$350 billion. Well, good to see we're going back to Reagan-size deficits.

Another good reason for making such forecasts - clients like it. Morgan Stanley is in the business of helping clients make portfolio decision. The better the forecast of primary market developments, the better the portfolio planning can be. As the time shortens to the actual sale of debt, Morgan's sales guys will be drumming up business among their clients, and an accurate estimate of the supply of debt helps guide that effort.

Implicit in this is concern about the price implications of Treasury supply, as you state, but even absent that, the forecast would still be made.

Doxagora suggests that the main effect of the dividend tax break will be to move money from bonds into stocks, rather than bring capital into the stock market from somewhere else; also, that if municipal bonds no longer have a tax advantage over stocks, city and state governments will be further screwed.

Wouldn't the upward pressure from additional bond funding be complemented with downward pressure as corporations move from debt-based financing to equity-based financing? Isn't that the goal of the abolishment of the dividend tax?

Thanks for any info.

Kilroy Was Here

Wouldn't the upward pressure from additional bond funding be complemented with downward pressure as corporations move from debt-based financing to equity-based financing? Isn't that the goal of the abolishment of the dividend tax?

Thanks for any info.

Kilroy Was Here

Banker: How are we going to make money if corporations don't issue debt?
Government: We can fix that
Banker: Cool. Oh and thanks for calling off the DA in NY.
Government: No problem. We're still using Arthur Anderson Accounting.

" the Bush proposal will be altered -- perhaps significantly -- as it makes its way through the legislative process"

Watch as they eviscerate this tax bill in the legislature. This current proposal has nothing to do with reality. Just "compassionate conservatism" right now, election campaigning. Next they will carve it up and blame the democrats but it will be them all the time. The democrats of coarse have no alternative. Even if you want to claim on a cash basis that the budget was at least closer to being balanced, during an almost unprecedented economic delusion, don't forget they claimed the income from spectrum auctions and continued funding the budget with FICA revenues.

By the way cutting the tax on dividends does not apply to 401K accounts since 1) they were not paying those taxes and 2) they will still have to pay those taxes in the end. Is a gift to the very rich and little more.

Then there is the need to finance the war on Iraq. Using the CBO's "Air Heavy" scenario and assuming a short conflict with a limited occupation, we are looking at $35 billion. A messier war with a year long occupation could exceed $100 billion. This financing requirement assumes that the war does not otherwise alter the path of the economy and tax revenues--a topic of another conversation.

Bruce: are you sure about your statement about tax-deferred accounts like the 401k? You'd have to look at the mechanics of the process before answering the question and I don't think the mechanics are detailled yet. You're simply bashing a sound economic plan for political reasons.

JT,

Today"s (1/9) WSJ, on page A4, says Bruce is right -- "So if a stock in a 401(k) pays a dividend, the owner would have to pay taxes on it when the money is taken out - even if it is a tax-free dividend." Could be the WSJ is wrong...

KH: I can't imagine it would actually end up working that way but if it does, I'd immediately join the opposition to this plan.

Can ppl comment on the idea at tabulae that the stimulus plan creates a huge tax loophole for income tax payers. Nobody else has mentioned it, and I'm wondering if it's true. It's at www.tabulae.com and was posted on Thursday (today) Thanks.

Marvin: I looked at it and the problem with the scheme is the assumption that marginal corporate tax rates are lower than the personal tax rate. The key distinction is between effective (what a corp actually pays) and marginal tax rates (what a corp pays on additional income). They are not at all the same thing. Paying employees through his scheme would be unlikely to save the corp any money. Tax accountants will almost certainly find clever ways to get around the revised tax system but that's not one of them.

Among other revisions announced in the Tax Complification Act (tm Calpundit), Preferred Stock is not affected, dividends on preferred stock will still be taxed.

Dear Bruce -

Of course, of course, of course you are right! This is a tax cut for the VERY rich and little more. There is even a hidden capital gains tax reduction built to the dividend tax cut.

The tax cuts DO NOT apply to any retirement accounts. Nor are dividends from bonds included, which will be a problem for older Americans. This is a gift of gifts to the VERY rich.

"By the way cutting the tax on dividends does not apply to 401K accounts since 1) they were not paying those taxes and 2) they will still have to pay those taxes in the end. Is a gift to the very rich and little more."

Joseph Stiglitz -

The dividend tax cut that was mentioned, about 40 percent of that money goes to the upper 1 percent. 220,000 American taxpayers will get the same amount as 120 million people at the bottom. I don't view that as fair.

To put it another way: The Secretary of Treasury according to the numbers in the Financial Times is going to get a tax cut that is equal -- roughly, to about 15,000 Americans in the 30 to 40,000 dollar tax bracket. The basic point is
that what this economy needs is a stimulus. This is not a stimulus.

January 9, 2003

Jobless, and Stunned
By BOB HERBERT - NYT

Left behind by the great Republican raid on the national Treasury are folks like Karelia Escobar and Joe Bergmann, middle-aged New Yorkers who have worked most of their lives but now find themselves traveling the anxious paths of the long-term unemployed.

With bills mounting and each day bringing a heightened sense of dread, they could use a little help. But the jobless are at the bottom of the economic heap, and the Bush administration's help seems always to go to the top.

Ms. Escobar is 43 and single, and lives in a small apartment in Queens. She has worked for a number of airlines over the past several years, most recently as a ticket agent for T.W.A. That job vanished with the World Trade Center.

"We were laid off Oct. 14, 2001," she said. "I haven't been able to find work since then. I've applied everywhere. I've gone back to school to improve my computer skills. I've learned another language. I feel very bad because I want to work so I can pay my bills. I've always worked. But now I can't find a job."

...

Mr. Bergmann, who lives in Midtown Manhattan, was a creative director for a firm that did interactive advertising. He was laid off Oct. 2, 2001, and, to his amazement, has been out of work ever since. When I asked if he ever imagined it would be so hard to find a job, he said, "Not at all. There's no way."

Mr. Bergmann, 54, is married and has two daughters. His wife works, but her employment outlook, even in the short term, is uncertain. The family has had the benefit of some savings and a bonus Mr. Bergmann earned at a previous job. But he does not know what will happen if he doesn't get another job soon....

Remember - NO TAX reduction for dividends or capital gains from stocks held in retirement accounts.

There was a capital gains tax break in addition to a stock dividend tax break. The capital gains break was revealed quietly by the treasury. Capital gains taxes are now 20 or 18 percent depending on asset holding periods.

January 9, 2003
Floyd Norris - NYT

...The president's plan also came up with a way for shareholders of profitable tax-paying companies to get a break even if the companies decide to distribute little or no cash in dividend payments. Companies that choose to reinvest in their businesses rather than pay dividends will pass on to their shareholders a
tax break that will reduce the capital gain they report when they sell their stock.

That twist, not widely understood when the plan's details were first disclosed, means that the tax bill may benefit holders of new-economy companies like Microsoft that pay no dividends as well as owners of old-economy companies like
General Motors that do pay them....

Duh -

Bruce: are you sure about your statement about tax-deferred accounts like the 401k? You'd have to look at the mechanics of the process before answering the question and I don't think the mechanics are detailled yet. You're simply bashing a sound economic plan for political reasons.

Bruce was very very sure and bashing a plan that needs to be bashed....

"Preferred Stock is not affected, dividends on preferred stock will still be taxed."

Please - Is this true as well? I could not confirm.

January 9, 2003

Floyd Norris - NYT

"Another surprise for many taxpayers may be that many securities called preferred stock will not pay dividends, at least as defined by the tax law. Those payouts, considered interest, will continue to be taxable under the law."

Good grief....

Just wanted to highlight another consequence of higher interest rates in the future--not only will U.S. firms have to pay more, but indebted developing countries as well (remember the 1980s?) Some will have borrowed and spent unwisely, but some will just be unlucky... This will, of course, hurt the U.S. as well, in both the marketplace and on the "street"..

Roland - Please explain the linkage further. Southern African countries are suffering so already, higher interest rates would be an impossible burden.

I don't like this plan much, but I don't think the complaints about unfair treatment of stock held in retirement accounts hold water.

When I put money into my IRA and buy stock with it I use UNTAXED income to buy a future dividend stream. When I actually get my hands on the dividends I pay tax on them.

Under the Bush plan, when I use ordinary income to buy stocks I use TAXED income to buy a future dividend stream, and pay no tax when I actually get the dividends.

In other words, outside the IRA (or 401K) I pay tax on the present value of the dividends at time of stock purchase, while in the retirement plan I pay tax whenI get the cash. Aren't these equivalent?

Several of the posts here have been along the lines of "can you confirm?" or "is it true?" or "I can"t imagine it will work out that way." I think I may have discovered part of the problem. Every tax rewrite is complex. In this case, however, the Dow news wire is quoting tax "experts" (ya never know quite what that means) who think a major problem with getting the Bush plan passed is its enormous complexity. Elected representatives are going to hear so many worries from some many interest that they may refuse to forward the bill, not because of what they know will happen, but because of what might happen after the IRS begins interpreting the bill. There are also unintended consequences, like shifting investors in tax brackets that have tended to favor munis away from that market because the elimination of taxes on dividends reduces the differential in returns. It probably wasn't Bush's intention to make life harder for the states and locals (though he wasn't trying very hard to make like easier), but that is the likely result if the dividend tax change passes.

>>>The tax cuts DO NOT apply to any retirement accounts. <<<

Now let's not get as careless as the press and all its instant pundits.

You can certainly get your tax-free dividends through a Roth IRA -- that's a retirement account. Don't have one? Walk to your local bank and set one up. You can even roll over assets from other retirement accounts into it. Presto! You are getting tax-free dividends through a retirement account -- the press and all its instant pundits notwithstanding.

>> "By the way cutting the tax on dividends does not apply to 401K accounts ...<<

Well, gee, anyone who is upset about losing this tax break on stocks held in a 401(k) should be *really* upset about how a 401(k) turns capital gains into ordinary, top-tax-rate income -- which figures to cost a whole lot more tax-wise. And also about how there's no capital loss deduction for stock losses incurred in a 401(k), which *certainly* has cost people one heck of a lot more recenlty.

How many people have been upset by these things to date?

It's just a matter of intelligently managing one's portfolio. Other things equal, one's taxable interest bearing securities go into a 401(k) to get tax-deferred compounding, and one's stocks are held outside it to get tax-favored capital gains if stocks go up, capital loss deductions if stocks go down -- and now maybe tax-free dividends. Really, no change from before.

>> Nor are dividends from bonds included...<<

Well, no, as bonds don't pay dividends. The dividends from one's savings account aren't included for the same reason.

>>Doxagora suggests that the main effect of the dividend tax break will be to move money from bonds into stocks...<<

From corporate bonds into corporate stocks certainly, deleveraging businesses -- on recent experience an outcome devoutly to be wished.

>>> ... also, that if municipal bonds no longer have a tax advantage over stocks, city and state governments will be further screwed.<<<

Tax-free municipal bonds have been the greatest tax-beating handout to the truly rich for generations. Did you ever see the income distribution of the people who beat all their taxes -- federal, state, and local -- with tax-exempt bonds?

How come such sympathy for protecting this huge sop to the ultra-rich, all of a sudden? Let 'em pay taxes. (The states will still be free to tax their dividends if they want to.)

As I pointed out on my web page yesterday, the shift in the US government's involvement in capital markets since 2000 is equal to 30% of the size of the market.