RE: Neutral taxation?/was Re: questions about dividend tax cut
Dan, even more than direct/indirect, you need to specify what is neutral. Given democracy, one (adult) person, one vote, a strong case can be made for a neutral poll tax. Of course it is not progressive like most income taxes. Flat rate taxes, sales/VAT taxes, even land taxes, affect some more than others. My own preferences are more towards a flat(er) tax, with a large (poverty level) deduction, and rates tending down (to zero?); a land tax, split between local, state, and federal (1/3 each? 50-25-25?); and ever increasing taxes on pollution. I am constantly annoyed at the greens wanting huge regulation but unwilling to support higher pollution taxes. Um, to get rid of the last 5% of income taxes, I'd even support deficit spending printing money (inflation, another fairly neutral tax, of about 2-3% per year). But of the course the MAIN problem is on the benfit side -- so many voters want, claim, demand, and only-vote-for those politicos who offer their favorite benefits. The demand for benefits drives the demand for tax revenue. And the coming (2020) Social Security baby boomer elephant-sized funding gap is gonna be a HUGE increase in benefit demand. Europe is even more vulnerable than the US or the UK. Sigh. What is to be done? (someone said that... I know, what's is name the commie!) Tom Grey But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan http://uweb.superlink.net/neptune/
RE: Neutral taxation?/was Re: questions about dividend tax cut
To Tom Grey (and others) 2 points: 1: why not retain land tax as a local tax, as this would ensure tax- payers the possibility of voting with ther feet, end thus ensure some degree of fiscal competition between neigbouring counties / municipalities? 2: I believe Austrain Economic Theory does noit regard inflation as a neutral tax, as one of it's main beliefs is that the earlier you get your hands on new money, the more you benefit - and vice-versa. I don't know whether this holds true for constant (that is: expected) inflation as you are descibing as well - anyone? Jacob Braestrup Danish Taxpayers Association Dan, even more than direct/indirect, you need to specify what is neutral. Given democracy, one (adult) person, one vote, a strong case can be made for a neutral poll tax. Of course it is not progressive like most income taxes. Flat rate taxes, sales/VAT taxes, even land taxes, affect some more than others. My own preferences are more towards a flat(er) tax, with a large (poverty level) deduction, and rates tending down (to zero?); a land tax, split between local, state, and federal (1/3 each? 50-25-25?); and ever increasing taxes on pollution. I am constantly annoyed at the greens wanting huge regulation but unwilling to support higher pollution taxes. Um, to get rid of the last 5% of income taxes, I'd even support deficit spending printing money (inflation, another fairly neutral tax, of about 2-3% per year). But of the course the MAIN problem is on the benfit side -- so many voters want, claim, demand, and only-vote-for those politicos who offer their favorite benefits. The demand for benefits drives the demand for tax revenue. And the coming (2020) Social Security baby boomer elephant-sized funding gap is gonna be a HUGE increase in benefit demand. Europe is even more vulnerable than the US or the UK. Sigh. What is to be done? (someone said that... I know, what's is name the commie!) Tom Grey But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan http://uweb.superlink.net/neptune/ -- NeoMail - Webmail
Re: questions about dividend tax cut
Fred Foldvary wrote: If there are zero taxes on corporate profits, but taxes on dividends, then the incentive is to retain earnings rather than pay dividends, and the shareholders get the profits tax-free until the shares are sold for capital gains. The shares might never be sold, but passed on to heirs. For tax fairness, given the income tax, all income should be taxed equally, and for efficiency, the tax system should minimize the impact on decisions. So it is better to tax corporate profits and then credit that against tax liabilities of dividend income. To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. That being said, the income tax is inherently unjust, complex, and burdensome, but that is another story. I disagree (not with your last point of course ¡V and it is partly because I agree with you on this point, I disagree with you on the rest) Below is an extract (rather lengthy, sorry) from my publication Simpler Taxes - A guide to the simplification of the british tax system (the whole publication may be downloaded free of charge here: http://www.adamsmith.org/policy/publications/pdf-files/simpler- taxes.pdf) ¡§The first problem when taxing personal income is determining what it is, most importantly distinguishing it from capital gains. Some will find such a distinction impossible and even unwanted, believing that any capital gain should be taxed as income. To those it could be argued that: h There is a big difference between income and capital gains, and h While the former is easily identified and taxed, the latter is not. The difference between income and capital gains is, in theory, clear enough: an income is a certain payment at a certain date, subject to a formal or informal contract, while a capital gain is uncertain and not guaranteed to be positive. Thus work wages or interests on bank deposits are clearly incomes, while increases in house prices or shares are clearly capital gains. The former are certain and guarantied by contracts, while the latter are uncertain and could just as well be negative. Dr. Barry Bracewell-Milnes described the difference thus : ¡§It is rather like the difference between night and day. Certainly there is a dusky time in the evening where it is difficult to say confidently whether night has fallen or not. But at most moments within any 24-hour period, everyone is perfectly well aware whether it is night or day¡K If the otherwise insignificant boundary becomes important in some context, then we set an arbitrary cut-off point ¡V as we do with ¡§lighting up time¡¨, a convention to prevent people driving unsafely while the night is still deepening¡¨ But what about these borderline cases? Clearly the problem of separating income from capital gains, and the possibility of transforming the first to the latter, have been the main driving forces behind treating capital gains as personal incomes subject to taxation. The problem overlooked by those who find the border between the two hard to police is, however, that the inclusion of capital gains as an income opens up a host of other boundaries to be policed. To what extent should capital losses be deductible, if at all? Should all capital losses in one¡¦s entire lifetime be deductible from any capital gains, or only those from within the same year as any gains? What about inflation in that period? To what extent should running investments in physical capital, or the opposite as the case might be, be included in calculations of capital gains? If a house is sold after 20 years of decay for the same price as it was bought, indexed for inflation, then surely some capital gain must have been materialised along the way by the owner. Should this gain be taxed? How is it calculated? If the same house is sold for twice the original price after being vigorously kept and refurbished, should this investment not be deductible? What if the bottom has gone out of the housing market and the house, despite investments, is still only worth the original price? Should the investments still be deductible? The list of questions is never-ending, and I shall not attempt to answer any of them. Neither shall I attempt to answer the other question faced when including capital gains as taxable incomes: which capital gains should be taxed and which should not. If policing the boundary between income and capital gains is difficult, this new boundary is even more so. As interns or trainees, many young people work for low wages in the anticipation that their value as workers will rise from the experience, and other young people spend years in universities hoping the same. Clearly these increases in ¡§personal¡¨ values are capital gains, but neither are taxed. Only the part of personal values actually materialised as income (if any) is being taxed. The capital gain itself is not, and
RE: Neutral taxation?/was Re: questions about dividend tax cut
I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? I suppose there *could* be a neutral tax, but what would be the point? It would be something like taking five dollars from everyone and giving them back five dollars worth of 'services'. Hmm, I guess that's truly not possible, though. Yes, I agree :) Susan Hogarth Triangle Beagle Rescue of NC www.tribeagles.org [EMAIL PROTECTED]
Re: questions about dividend tax cut
--- Jacob W Braestrup [EMAIL PROTECTED] wrote: an income is a certain payment at a certain date, subject to a formal or informal contract, That is income from an accounting view, but not from the economic perspective. Economic income has no regard for contracts. In economics, income equals consumption plus the change in net worth during some time. while a capital gain is uncertain and not guaranteed to be positive. The ex-ante uncertainty is irrelevant. Dividends are also uncertain ex-ante. For income, we take some time period, such as a year, and calculate the change in actual net worth. If the change in net worth is negative, it gets subtracted from consumption. It is possible for income to be negative. Fred Foldvary = [EMAIL PROTECTED]
Re: Neutral taxation?/was Re: questions about dividend tax cut
Dear Tom, I hope I got your definition of neutral right in the last post. As I indicated, I'd support a poll tax (so long as I'm an armchair intellectual and not running for office, which with my abrasive personality would be a joke anyway). I also support a flatter income tax. In fact I'd like to see something along the lines of the Forbes flat tax with a single rate above the exemption. I've got a master's degree in taxation and used to work as a tax practioner, and so saw first-hand some of the heavy cost of complying with the complex income tax. A simpler system would reduce the compliance costs. I don't really want to replace all the tax revenue generated by the current income tax; personally I'd like to see the federal government spend a fifth to a fourth of what it does now. I agree that much of the problem comes on the benefit side, with almost everyone (except Democratic politicians in the federal government--I wonder why they lost the Senate?) supporting some sort of tax cuts but nobody wanting their own benefits cut. I'd love to hear some good (or even some mediocre) suggestions on how to overcome the problem. Under Gramm-Rudman, which lasted basically covered Reagan's second term, discretionary federal non-defense spending grew at its slowest rate since the 1920s, so it may be that the threat of automatic across-the-board cuts have the most success by forcing competing interests to fight with each other rather than cooperate to raise federal spending in the aggregate. It didn't last very long and only happened under the threat of huge deficits and indeed broke down when the automatic cuts got large, so I'm not actually too optimistic about the success of such things. DBL In a message dated 1/16/03 5:20:18 AM, [EMAIL PROTECTED] writes: Dan, even more than direct/indirect, you need to specify what is neutral. Given democracy, one (adult) person, one vote, a strong case can be made for a neutral poll tax. Of course it is not progressive like most income taxes. Flat rate taxes, sales/VAT taxes, even land taxes, affect some more than others. My own preferences are more towards a flat(er) tax, with a large (poverty level) deduction, and rates tending down (to zero?); a land tax, split between local, state, and federal (1/3 each? 50-25-25?); and ever increasing taxes on pollution. I am constantly annoyed at the greens wanting huge regulation but unwilling to support higher pollution taxes. Um, to get rid of the last 5% of income taxes, I'd even support deficit spending printing money (inflation, another fairly neutral tax, of about 2-3% per year). But of the course the MAIN problem is on the benfit side -- so many voters want, claim, demand, and only-vote-for those politicos who offer their favorite benefits. The demand for benefits drives the demand for tax revenue. And the coming (2020) Social Security baby boomer elephant-sized funding gap is gonna be a HUGE increase in benefit demand. Europe is even more vulnerable than the US or the UK. Sigh. What is to be done? (someone said that... I know, what's is name the commie!) Tom Grey
Re: Neutral taxation?/was Re: questions about dividend tax cut
In a message dated 1/16/03 11:57:03 AM, [EMAIL PROTECTED] writes: AdmrlLocke wrote: The farmer felt no compunction at all about complaining that while under the income tax system he pays no tax, under a sales tax he'd pay a hefty tax. He pays nothing and he thinks he's entitled to pay nothing while everyone else pays something.) This kind of rhetoric never seizes to amaze me. Why do people get away with it? I'm tempted to say that it's because America is dominated by WASP culture, and WASP culture promotes polite and confict-aversion over confrontational truth. I don't really think, however, that that fully explains why such people don't get confronted more, although it might explain much of that particular story, since I was sitting in a WASPy country club in small-town Iowa. :) I think that in America certain groups of people have gotten benefits because, deservedly so or not, many other Americans believed that the beneficiaries deserved the benefits. Much of the Great Society--occasional liberal protestations to the contrary notwithstanding--appealed to urban/suburban Northern white middle-income guilt over the treatment of blacks in America, particularly (but not exclusively) during slavery. These voters believed (rightfully so) that blacks had been oppressed (slavery, Jim Crow, etc.) and that therefore someone should pay them, or their descendants, something (a rather tenuous conclusion, I'll admit, and the one behind the 'reparations' movement these days). These voters also saw having the government make these payments as an easy, cost-free way (a decidedly false assumption) to expiate their guilt for evils perpetrated by other people. Until the Great Society's heavy costs (inflation, welfare-dependence, destruction of black neighborhoods and families) started to appear clearly in the 1970s, very few of these voters felt any desire to criticize the programs, or the recipients who developed an entitlement mentality, or feared to express such criticizms for fear of being branded racist, as the Democrats routinely do and have done since the 1960s. In the farmer's case, there's a centuries'-long American love-affair with rurality and the famer. We start with the early colonial stories of America as a great garden, the Jeffersonian ideal of the sturdy yeoman farming his land, the American notion of the farmer as the salt of the earth, the non-economic notion that the farmer feeds us (as though out of the goodness of his heart for us poor, starving urban dwellers). Indeed a hostility toward the sick, polluted, direct city and preference for the clean, growing countryside goes back to pre-colonial English (and Continental) roots. Farmers in America tried for decades starting in the late 19th century to get various types of government benefits, but only when their relative numbers had declined to less than half the population could they actually manage to start squeezing out some small benefits in the 1920s. Now that less than half of a percent of the US population engages in full-time farming, taxpayers can afford to exempt farmers entirely from federal income taxation, pay then individually tens and sometimes hundreds of thousands of dollars, and yet barely notice. For decades it hardly seemed worth the effort to debunk the noble farming myth in order to cut agricultural price subsidies, although in the mid-1990s the Democrats' allies in the media made cutting ag subsidies the key test of whether Republians were really serious about cutting entitlements. (Note: Republicans did phase out the notorious ag price supports [though not all federal ag subsidies] but got not credit from the news media, whose members conveniently forgot they'd set up ag subsidies as the key test). Civil War veterans, however, stand out as the first group to create a sense among the voters that they deserved to feed at the federal trough, and for the next half-century or so got increasingly large and wide benefits. Eventually Congress passed what some have called a Sneeze Clause or something like that: if a Civil War veteran ever sneezed in your direction you got veteran benefits. I understand that veterans today still get substantial, wide-ranging federal benefits, thought I'm not at all sure that having a separate, completely-socialized medical system doesn't hurt them much more than it helps. Here in Denmark, we often hear similar rhetoric on welfare benefits. If someone in the media is advocating a reduction (or more likely, advocating a lower increase) in welfare benefits, the interviewer will gladly turn to someone, who will say: “I actually receive welfare benefits, and I think they are too low”. That’s it – end of discussion!! The general feeling is: “Well, this guy actually receives benefits, so he’s gotta be the expert, right?” – “on the other hand, the idiot who proposed the cut (lower increase) doesn’t receive
Re: questions about dividend tax cut
On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. My guess is politics. Cut taxes on Corporations! does not sound like a winning issues, given the level of economic literacy of the news media (as Bill pointed out).
Re: questions about dividend tax cut
why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If there are zero taxes on corporate profits, but taxes on dividends, then the incentive is to retain earnings rather than pay dividends, and the shareholders get the profits tax-free until the shares are sold for capital gains. The shares might never be sold, but passed on to heirs. For tax fairness, given the income tax, all income should be taxed equally, and for efficiency, the tax system should minimize the impact on decisions. So it is better to tax corporate profits and then credit that against tax liabilities of dividend income. To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. That being said, the income tax is inherently unjust, complex, and burdensome, but that is another story. Fred Foldvary = [EMAIL PROTECTED]
Neutral taxation?/was Re: questions about dividend tax cut
On Wednesday, January 15, 2003 7:11 PM Fred Foldvary [EMAIL PROTECTED] wrote: To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan http://uweb.superlink.net/neptune/
Re: Neutral taxation?/was Re: questions about dividend tax cut
Dear Dan, I actually do agree, which is part of why when my conservative friends would support a national sales tax instead of an income tax as though a national sales tax were a panacea I'd just shake my head and tell them, there's no such thing as an unburdensome tax. There's no unburdensome way for the federal government to confiscate a third of national income. Some taxes bear more heavily on some people than others, so shifting between them may change how much of the burden a particular individual shares. People naturally tend (and I do say tend) to support moving to a sytem that shifts some of the burden they bear to somebody else, or on keeping the status quo if the current system rests relatively little burden on themselves. (As a case in point, a farmer showed up to listent to Indiana Senator Dick Lugar, campaigning for president in Iowa, speak about replacing the income tax with a sales tax. The farmer felt no compunction at all about complaining that while under the income tax system he pays no tax, under a sales tax he'd pay a hefty tax. He pays nothing and he thinks he's entitled to pay nothing while everyone else pays something.) I can't imagine any tax that would be neutral, but some might be less injurious to economic growth than others. I'm not persuaded, however, that taxing consumption more heavily than income will discourage economic growth any less than taxing income more heavily than consumption, since the ultimate goal of producing income is to consume it anyway. In a message dated 1/15/03 10:51:58 PM, [EMAIL PROTECTED] writes: On Wednesday, January 15, 2003 7:11 PM Fred Foldvary [EMAIL PROTECTED] wrote: To achieve neutrality, unrealized gains should be taxed annually, and then we can forget about capital gains. But this assumes that taxes can be neutral. I would tend to agree with Larry Sechrest here -- viz., there are no neutral taxes. (Sechrest's position is laid out in his Rand, Anarchy, and Taxes in _The Journal of Ayn Rand Studies_ 1(2).) Do any of you agree? Cheers! Dan
Cutting Corporate Tax Instead of Tax on Dividends (Was Re: questions about dividend tax cut
Originally the federal income tax law sought to tax income closest to the source, presumably because the farther from the source, the more easily income might escape detection and therefore taxation. In the hearings over the 1913 income tax law one member of Congress suggested simply taxing each shareholder on his pro rata share of corporate income, but got shot down. As far as eliminating the corporate income tax today, look at all the furor the advocates of punitive taxation (notice I didn't say the advocates of statism ) have raised over Bush's proposal to cut taxation of dividends. Can you imagine the holy hysteria they'd raise over cutting the corporate tax instead? It seems likely that even more people would agree that such a cut in tax constituted a tax cut for the wealthy since in their minds it would be going to corporations instead of people. David Levenstam In a message dated 1/13/03 7:50:22 PM, [EMAIL PROTECTED] writes: On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. I predict we'll also see companies issue new stock and then immediately distribute the capital as dividends in order to dilute their stock value - the opposite of the stock buy-back programs that companies undertake today to avoid paying dividends.
questions about dividend tax cut
Howdy, I have some questions about the dividend tax cut (elimination). Let's suppose that the elimination of taxes on dividend income to stock holders is instituded and it is a complete suprise to the public, so that no adjustment can take place either in expectation of it being passed, or after it is passed but before it takes effect. Let's also assume that growth opportunities are not an issue, so the price is wholly dependent on dividends. If the price of a stock is the PV of the dividend stream into the future, then should there merely be a one time jump in the value of a stock as a result? More concretely, if the tax rate was T, then a dividend was worth (1-T)D, where D is the amount of the dividend. And the present value of the perpetuity, i.e. the dividend stream, would be (1-T)D/r, where r is the interest rate (right?). So the price of the of the stock would be P=(1-T)D/r. Now the suprise tax cut comes into effect. The price of the stock should jump to P'=(1-0)D/r=D/r. Thus, there should be merely a one off jump in the share price by the amount P'-P=[D/r]-[(1-T)D/r]=(D+T)/r. Is this correct? Should the tax rate on dividend income be included in the pricing of the shares, and should we see a jump in prices? I suppose that intstead of T:=tax rate on dividends, I could have used T:=Td-To, where Td is the tax rate on dividends and To is the tax rate on some other investment. Would that be correct? Okay. Assuming the above is correct, then the rate of return on a stock should increase from (1-T)D/P to D/P'. The increase in the rate of return then is =[(1-T)D/P]-[D/P'] =[D/(D/r)]-[(1-T)D/{(1-T)D/r}] =r-r =0. So the increase in the rate of return on stocks should be equal to zero. Stocks are no more profitable after the tax cut than before--it shouldn't help the market at all. If dividend income tax is not priced into the stock, then again, there should be no change in the profitability of stocks, because P=P' and 1-0=1. The same should be true if T:=Td-To, correct? Is my conclusion that the dividend tax cut should have no impact on the rate of return of stocks correct? Is the only effect of such a tax cut to provide a once off permanent increase in the wealth of stock holders as the price jumps from P to P', thus stimulating the economy solely through the wealth effect of that change? If this conclusion is correct, how will loosening the two assumptions, first that the cut is publicly known before it takes effect and second that the present value of growth opportunities are taken into account in share pricing, affect the conclusion? Will loosening the second assumption change corporate behavior viz. investing in growth vs. paying dividends? What should we expect that change to be? Has this question already been asked on this list and I missed it? Curiously yours, jsh __ Do you Yahoo!? Yahoo! Mail Plus - Powerful. Affordable. Sign up now. http://mailplus.yahoo.com
Re: questions about dividend tax cut
--- john hull [EMAIL PROTECTED] wrote: If the price of a stock is the PV of the dividend stream into the future, then should there merely be a one time jump in the value of a stock as a result? No. There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Fred Foldvary = [EMAIL PROTECTED]
Re: questions about dividend tax cut
--- john hull [EMAIL PROTECTED] wrote: Now the suprise tax cut comes into effect. The price of the stock should jump to P'=(1-0)D/r=D/r. Thus, there should be merely a one off jump in the share price by the amount P'-P=[D/r]-[(1-T)D/r]=(D+T)/r. Mistake #1, (D+T)/r is greater than the price itself. I don't think the rest depends on that. Back to the drawing board for that part. Sorry about that. -jsh __ Do you Yahoo!? Yahoo! Mail Plus - Powerful. Affordable. Sign up now. http://mailplus.yahoo.com
Re: questions about dividend tax cut
On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. I predict we'll also see companies issue new stock and then immediately distribute the capital as dividends in order to dilute their stock value - the opposite of the stock buy-back programs that companies undertake today to avoid paying dividends.
Re: questions about dividend tax cut
Would any company give dividend then? Wei Dai [EMAIL PROTECTED] To: [EMAIL PROTECTED] om cc: Sent by: Subject: Re: questions about dividend tax cut owner-ARMCHAIR@g mu.edu 14/01/2003 08:40 Please respond to ARMCHAIR On Mon, Jan 13, 2003 at 01:44:59PM -0800, Fred Foldvary wrote: There is also a supply-side effect from cutting the marginal tax rate, from less uncertainty about the company as it shifts to less debt and more equity, as well as more investor confidence when the profits are sent to the shareholders rather than retained by possibly theiving executives. Any idea why the dividend tax, instead of the corporate income tax, is being proposed for a cut? If we want to end double taxation of dividends, it makes more sense to me to eliminate the corporate income tax instead of the dividend tax. Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. I predict we'll also see companies issue new stock and then immediately distribute the capital as dividends in order to dilute their stock value - the opposite of the stock buy-back programs that companies undertake today to avoid paying dividends.
Re: questions about dividend tax cut
--- Wei Dai [EMAIL PROTECTED] wrote: Cutting taxes on dividends while keeping taxes on capital gains seems to provide a perverse incentive for companies to retain as little profits as possible, leading to a higher rate of corporate bankruptcy in the future. My recollection from reading about it is that the proposal does indeed cut the tax on capital gains to the extent it is due to retained earnings, as the attempt is neutrality with repect to paying dividends or not. However, to truly do capital gains right, it needs to be indexed for inflation. Fred Foldvary = [EMAIL PROTECTED]