I’ve always suspected the dividend tax cut was less about tax efficiency and more about, well, cutting taxes. Floyd Norris confirms my suspicions. Far from taking the liberal line on the issue, Norris supported the Bush plan as originally proposed, for reasons many business and economics commentators seemed to like it, but mainly because it got rid of the incentive for corporations to take on debt rather than issue stock. Also, the measure promised to address corporate loopholes through the marketplace, the dividend tax cut would apply only to stocks whose firm paid corporate tax. What we got, Norris points out, achieves neither of those goals:
There is no meaningful reform. Dividend tax rates are to be cut even for companies that avoid paying corporate income taxes. Corporate tax shelters may continue to proliferate. Companies will have little incentive to stop borrowing and issue stock instead. There may even be a rush by some companies to borrow money to pay dividends before the tax rate might go back up.
Pam Olson, the Treasury’s assistant secretary for tax policy, argued yesterday that there is reform in the bill, thanks to the temporary equation of capital gains and dividend tax rates. But it will still be more tax efficient for companies to buy back stock rather than pay dividends. That change is likely to have minimal effect.
Like I mentioned a few days ago, the Democrats would do well to start thinking creatively about tax reform. Perhaps in the process they can show up Republicans’ claims to be reformers as hollow posturing.
No comments have been added to this post yet.