On Sat, Mar 01, 2003 at 12:15:18PM -0600, Dan Minette wrote: > > From: "John D. Giorgis" <[EMAIL PROTECTED]> > > > At 10:02 AM 2/22/2003 -0600 Dan Minette wrote:
> And, of course, all earned income about 75k (or so) for an individual > is excluded from SS taxes. So, this further concentrates the tax. or so = +$9,900.00 (the cap is $84900 for 2002, and goes up in 2003) > >Most economists, including Greenspan and just about every other economist > I have been associated with, >believes that the double-taxation of > dividends produces economic distortions that should > > be corrected. > > It depends on exactly what they mean by that. What distortions would be > eliminated? The one that I see is the one that encourages compaines to > earn profits, but not pay dividends. Why would this be bad? I'm having trouble parsing your statement above. My best guess is that you are saying that you think it is good for companies to earn profits and not pay dividends? I disagree with such a statement. I'll explain. Here's the way I understand the system as it is now: -corporate earnings are taxable to corporations -interest payments made to corporate bond-holders are taxable to individuals (at income tax rates) and tax DEDUCTIBLE to corporations -dividends paid are taxable to individuals (at income tax rates) and are NOT tax deductible to corporations -capital gains (from selling stock) realized by individuals are taxable at capital gains rates, which are less than income tax rates So, there are two biases apparent to me: 1) Corporations should tend to favor debt financing (selling bonds) over equity financing (selling stock). 2) Corporations would tend to favor not paying out earnings to shareholders as dividends because executives argue that the corporation can invest the earnings, make an acquisition, or buy back their stock, thus increasing the value of the company and creating capital gains for the shareholders. If you think that corporate debt is too high, as many people do these days, then (1) is providing the wrong incentive. Corporate debt as a percentage of earnings is at historically high levels, and corporate bankruptcies have been frequent. I think providing a disincentive (or less of an incentive) for corporate debt would be prudent. The fix is obvious and symmetrical: make dividends paid tax deductible to the CORPORATIONS (but still taxable to shareholders). As for (2), it sounds good in theory. But in practice, few companies actually buy back a significant portion of their shares, and many that do use the shares to provide stock compensation to executives and employees (which does NOT provide a direct benefit to shareholders). And re-investing the earnings as capital or making an acquisition only makes sense if it adds economic value to the company (in financial terms, if the return on invested capital exceeds the weighted average cost of capital). For far too many corporations, this is not the case. If the corporation cannot make better use of the money than the shareholders, than the corporation should pay the money out as dividends. The fix for (2) is not so clear. Possibly making dividends taxable to individuals at capital gains tax rates based on how long the shareholder has owned the stock (i.e., dividends are taxed at income rate for the 1st year of holding, and then at capital gains rates thereafter) > And his strong belief that it is the euentrerprenure class that > creates wealth and gives jobs to everyone else. You say this like you disagree, Dan? Or did I not read your implication correctly? While it seems "trickle-down" economics doesn't work so well, I don't think it follows that entrepreneurs are not responsible for creating a great deal of wealth and jobs. I'd interpret it to mean that tax breaks for the wealthy don't strongly effect the level of entrepreneurial activity. > The point is that the continued concentration of income is not > inherent part of ecconomic growth. Indeed, mechanisms that foster the > distribution of income can help facilitate ecconomic growth. That > debate, whether ecconomic growth is best achieved by tax policies that > benefit the holders of wealth vs. policies that benefit the average > consumer/worker. Indeed, one could even argue whether policies that > facilitate the concentration of wealth vs. the spread of wealth are > most helpful. This is an interesting concept to think about. One thing to consider is that the less wealthy will always have some incentive to work or create or innovate in order to move into the more wealthy classes. But what about the already very wealthy? Where is their incentive? Well, maybe it comes from "taking" away some of there wealth and keeping them on their toes, working and innovating, to try to get it back! Presumably the wealthy classes will have a large proportion of skilled entrepreneurs and capital allocators, so providing them with adequate incentive is important to the health of the economy. But is giving them tax cuts going to provide that incentive? -- "Erik Reuter" <[EMAIL PROTECTED]> http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
