I'd be happier if a serious economist like Boskin was paying more attention to the Second Best principle in assessing the Bush proposal. We're all taking it for granted that removing one tax distortion makes the overall economy work better. But with the tax system and financial markets having so many other distortions it's not clear. Think of the administrative complexity of dropping yet another deduction into the tax code, let alone the broader efficiency issues. Hubbard of all people should be aware of the linkage between dividend policy and financial markets. But I doubt such subtleties have much currency in this White House.

For example, I haven't seen evidence of even a rudimentary analysis of what effect this will have on the borrowing costs of state and local governments due to the competition dividend paying stocks will bring to municipal bonds.

An economist recently called the accumulation of ever-more wealth in ever-fewer hands an "unlovely result," yet, between the elimination of the estate tax and with it the sole exposure of untaxed capital gains passed from one generation to the next, and the proposed elimination of taxes on dividends, this appears to be a theme of Bush tax policy.

It is hardly "class warfare" to note that this result is not at all unlovely to some rather influential American dynasties.

Brad (or anybody): How much dynamic scoring is in the WH maths? How much induced growth is figured in to its (fsical balance) credit? How much induced dividend-distributing behavior is figured in to its (fiscal balance) discredit?

And what happens when JCT/CBO get their hands on it?

Mureen Dowd - NYTimes

"Mr. Rove and his president have a new style of class warfare — the affluent afflicting the afflicted; the ruling class enacting policies to help itself, weaving a pashmina safety net so the well-off can buy more expensive stuff they don't need."

Please do consider -

Does elimination of the tax on stocks dividends received by individuals, distort the value of bond or cd dividends? Many older persons rely on interest from bonds and cds. Will these people be set at a further disadvantage to wealthy stock investors?

From a philosopher trying to understand....

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I can't figure out all this talk about "double taxation." The income tax system is based on taxing each transfer of money from one entity to another. A person pays a corporation for a product and the corporation is taxed on the profit. The corporation pays a dividend and the shareholder is taxed on the income. The shareholder takes his dividend to a store and the storeowner pays an income tax. The storeowner buys his supplies from the corporation and the corporation pays another tax. There is no beginning or end to the revenue stream and each transfer is taxed. What is so unique about the transfer of money from the corporation to the shareholder that it elicits a claim of double taxation?

philosopher -- It's a bit trickier than that. Taxable returns (interest) on debt instruments would actually rise to maintain after-tax parity with untaxed returns (dividends) on equity instruments.

Debt capital (borrowing) would become more expensive to corporations, governments, and individuals in general. Households -- more net debtors than net lendors -- would suffer in this exchange. Corporations -- which have paid out cash (and equivalents) rather than let it pile up -- would become comparatively worse credit risks, and would pay even more dearly still when they do borrow (which is quite a lot). Local governments probably get hit hardest -- tax-free municipal bonds losing their relative advantage.

More stocks will become "income stocks" (those paying a high fraction of earnings as dividends). It will become irrational for tax-sheltered retirement vehicles (401k's etc.) to hold income stocks (because such stocks are worth more to shareholders in different tax situations), though income stocks are traditionally less risky investments than "growth stocks".

Capital generally may migrate to less aggressive, less growth-oriented investments. High net worth individuals will tend to invet more in safe, stodgy ventures, and low net worth individuals will tend to invest more in "casino" ventures.

Clever lawyers and accountants will find clever ways to re-label many flows of income (nobody knows how much) as dividends, taking advantage of the "free pass".

And then someone will come along and assert "we need to fix these distortions in our tax system by making interest tax-free".

And a bunch of other things will happen, and I can't think what they all are, and if I did I'd be wrong about some of them. We are fortunate indeed our futures (and options thereon) are in the hands of wiser stewards than I.

The idea behind the notion of "double taxation" is that the purpose of a corporation is to serve people, so if revenue is to be raised, tax the people directly, whether they be shareholders, employees, or customers, rather than the corporation, so it is more clear what the tax burden is, and who is paying it. I would favor ending the corporate income tax completely, at least for publicly held corporations, and raising revenue soley through undifferentiated tax rates on personal income, whether that income is in the form of dividends, capital gains, or wages. Actually, if given a magic wand, I would favor a much smaller state and having revenues raised soley through consumption taxes, with some base level of consumption excluded. Oh, to dream.....

broadening the base

Brad, what are you referring to? Is there something currently NOT taxed thay you'd like to see included in the base?

One of the callers asked an interesting question that Boskin waffled on. The callers question was something along the lines of why not let corporations avoid paying taxes on dividends instead of the recepients. Presumably, allowing corporations a write-off on dividend payments. Boskin gave the stock economist answer which was that the people who receive the dividends and the corporations are the same entity so it does not matter.

Why do I then believe that if someone proposed changing the plan in that fashion the Administration will not be too pleased? In my mind there are important structural features that counter Boskin's simple equivalence statement.

1) Tax Lawyers: It is by no means clear that some of these companies are being double taxed. Any company with a good tax lawyer could end up not paying taxes on its income and then distributing it tax-free to its shareholders. In this case it is clearly better to have the tax break go to the recepients and not the payers.

2) Differences across owners: one class of owners 401(k) account holders seem to be getting the shaft because they will eventually pay taxes on their dividend income while stockholders who hold stocks outside 401(k) plans don't pay taxes. unless this is changed it seems that the proposed system favors one class of owners over the other whereas allowing the tax writeoff at the corporate level would favor both parties equally.

Perhaps there is something wrong in my analysis. Looking forward to wise feedback

One the other hand...there is the dynamic, non-pin-head, reality.

Tax free profit sharing stocks represent a significant opportunity for the fastest growing segment of the 100M and growing investor class (lot a votes), the young and entry/low level middle class. It becomes an income producing instrument for retirement, tax free, other than SocSec.

And who would want them to deny this opportunity, because some bureaucrat knows better?

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Not to mention taking the volatility out of the stock market, especially when an INTC Intel can issue profit share stocks for new plant investment their next wave wifi/wireless Banias effort.

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Most interesting?

I did notice Brad cribbing Paul Krugman. Ooops.

DeLong: "A sensible plan would rush help to the long-term unemployed, whose benefits--in an act of remarkable stupidity--lapsed last month."

Krugman: "Right now a sensible plan would rush help to the long-term unemployed, whose benefits — in an act of incredible callousness — were allowed to lapse last month."

Not good.

Does anyone believe that there was any policy analysis done on the dividend tax or any other proposal made by this administration? Long before the personal computer age I can remember "running out the trees" to evaluate the impact of a proposal. Based on Brad's and other comments, it appears to me that no one has done this yet. I certainly cannot envision all the potential impacts of the dividend proposal but had at least thought about some of the many mentioned here.

I do know that the small life insurance company tax rate is about 14%. What a great way for wealthy individuals, families and who knows who else to shelter interest income and turn it into non taxed dividends. This may not be the best way, but the boondoggles will be coming out of the ground like weeds in the garden.

Sam Taylor

>>I did notice Brad cribbing Paul Krugman. Ooops.<<

Why "ooops"? Of course I crib my talking points from Paul Krugman. He has an incisive gift for getting the truth into memorable and effective sentences that I cannot match. He's a genius, after all...

1) Tax Lawyers: It is by no means clear that some of these companies are being double taxed. Any company with a good tax lawyer could end up not paying taxes on its income and then distributing it tax-free to its shareholders. In this case it is clearly better to have the tax break go to the recepients and not the payers.

Bingo. Corporate taxes have fallen through the floor due to this.