Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)–dividends at capital gains rate
by Linda Beale
crossposted with Ataxingmatter
Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)–dividends at capital gains rate
IN this series, i’ve been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year.
The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts.
1.The Republicans who pushed the cuts claimed first that they were intended to return to taxpayers the surplus. Of course, that argument was laughable from the beginning: Bush deficits started in the first year of the Bush regime and got worse for the long term as the costs of a military budget pumped up by preemptive war and other augmenting of government spending at the same time that tax revenues were cut again and again throughout the regime.
2.Various Republicans also admitted that their goal was to cut the size of government–though they didn’t mean the military and they did mean any programs that protect average Americans (such as Social Security, unemployment compensation, environmental programs, OSHA, etc.). But the size of government grew in spite of the reductions in revenue, resulting in expanding deficits.
3.The various expensing provisions; repatriation with almost no taxation (in the 2004 “American Jobs Creation Act”); tax breaks for oil and other natural resource companies; international tax breaks; and other corporate-favorable provisions were supposed to stimulate entrepreneurial activity and job creation. Instead, businesses used the low-tax repatriated income to pay managers more and workers less, and laid off workers at the same time. The expensing provisions allowed corporations tax breaks for equipment they would have bought anyway, but didn’t create new jobs–the Bush regime’s jobs record was terrible, barely keeping up with inflation and certainly not spurring new job growth. The tax breaks for natural resource companies fed their complacency about everything from jobs to safety to environmental protection–giving companies more for less doesn’t create better citizens and doesn’t get us cheaper energy either. The record from the tax cuts as far as entrepreneurialism and job creation was dismal–the mainstream neoconservative and neoliberal theories of market fundamentalism didn’t work out as claimed.
4.The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation. Bullshit. Most of the result was just more money in the pocket of the richest Americans who own most of the financial assets, and that money in the pocket was as likely to be invested in offshore bank accounts as put to work supporting a new business here in the US. The dividend tax cut didn’t even lead to much in the way of dividend payouts–except perhaps for firms whose managers and directors saw a chance to benefit themselves. Even if those expiring tax cuts are not renewed with new tax legislation, it is not likely to have much of an effect on companies’ dividend policies. See Higher Taxes May Not Push Firms to Cut Dividends, Wall St. J., Aug. 30, 2010.
5.The cuts in individual rates were supposed to provide more money as an economic stimulus. But the Republicans who passed those rate cuts knew that the AMT would act as a clawback to the cuts over time, except for those at the very top who were always subject to the AMT and those in the bottom who are hardly ever subject to the AMT. And they knew that amending the AMT to conform to the temporary tax cuts would be tremendously expensive–at least a trillion in revenue lost for the decade of the tax cuts, where the “temporary” nature of the bill had been necessary to claim that the cost was “just” 1.3 trillion over a decade. In other words, the tax cut bills passed during the Bush regime with the 2010 sunsetting gimmick were a sham from the beginning–they cost much more than those who passed them wanted to admit, and they carried with them a clawback mechanism that would undo the cuts in rates for many individuals. The various annual “patches” to the AMT are extraordinarily costly in terms of lost tax revenues since they are essentially an extension of the tax cuts to an even broader base, and the corporate changes to the AMT have reduced its effectiveness in cutting back on corporate preferences while costing the fisc billions.
6.The estate tax scaleback and one-year repeal was the most gimmicking of all. Cutting the budget by $30 billion a year in order to fund a giveaway to the wealthiest and most privileged Americans is hard to justify in any budgetary climate. So Republicans pushing estate tax repeal and the various “coalitions” funded by wealthy families like the Walton heirs have painted a facade of “helping little guy farmers and businesses” on their efforts–a facade that many Americans may have bought hook, line, and sinker since they do not tell the truth, much less the whole story. Very few family farms and very few small businesses are threatened at all by the estate tax.
So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter?
1.I say let the Bush cuts expire according to the way they were written. But enact a new set of tax cuts that are better targeted to jumpstart the economy and to put money where it is needed.
2.Let the corporate giveaways expire as slated.
3.Let the estate tax mess expire as slated. Enact a new estate tax law that (i) increases the exemption amount to a reasonable level (say, $2 million) and indexes it for inflation and (ii) enacts a progressive rate structure (ranging from 55% on the estate that exceeds the exemption amount, up to some higher rate of 65% or 70% on multi-billion-dollar estates.
4.Let the capital gains changes die as slated, and do not enact any further capital gains preferences (so dividends would go back to being treated as ordinary income).
5.Let the individual rate changes die as slated, and enact a new tax cut for individuals making $100,000 or less, with a temporary tax cut for individuals making up to $200,000 for a three year period to aid us in getting out of this recession.
6.Enact genuine AMT reform–in which capital gains are treated as a preference and which provides a significant exemption amount based on gross income. See the earlier articles (2005-2006) in ataxingmatter on AMT reform for more specifics about the kinds of reforms to the AMT that make sense.
7.In conntection with the rate cut and AMT legislation, enact measures to pay for the tax cut, including
(i) a carried interest provision taxing all profits interests as ordinary income
(ii) a corporate tax provision limiting the benefits of tax-free reorganizations and consolidations, and
(iii) a charitable contribution provision eliminating the deduction of value in excess of basis.
The end result of the Bush Tax Cut is we have an higher deficit, a larger national debt and the deepest recession since the great depression. Most people don’t realize that the Fed won’t allow the economy to grow more than 3-4%. If the economy is already growing at that percentage then all a tax cut does is give the rich money to fuel wild speculation.
“The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation.”
Same thing I said last time. This is absolutely standard economics of taxation. Future growth is improved by having lower taxes on capital than the taxes on income or consumption. This is the way those social democratic paradii, the Nordics, work.
And US dividend taxation is hugely out of step with the rest of the world. Almost all countries either tax at the corporate level (ie, the company pays corporation tax then distributes dividends) or at the individual level (dividends are taxed at marginal income tax rates for the recipients, corporation tax is only charged on the undistributed profits of the company).
The US is near unique in charging both the corporate profits tax on dividends before distribution and then also income tax to the recipient. Bad idea.
How about buy T-Bills and cut coupons with money from deferring taxes, so Bush, Obama, and the war profiteers run amok bankrupting the US occupying the world.
Don,
The US is unique in the rates being so low they have to sell T-Bills competing with other financial instruments.
I am not in favor of guiding corporate finance from the congress’ finance committees.
jimi,
Where is 2)?
Oh, yeah I almost forgot, where are the surpluses as far as the eye can see?
And for stimulus what in 2007-2008 tanked the US economy to depths not seen since 1933?
Throw in the deficit numbers, and the rise in money supply M3, oh yeah they stopped reporting that………………
What don’t work, here?
What? No payroll tax holiday?
That’s how to target the tax cuts, no?
Read this strange insider story about a hedge fund operated out of Austria:
http://proposition13.blogspot.com/2010/08/paragon-advertising-back-to-it.html
yes, part of the argument about dividends is to make equity viable as an alternative to debt. But I think that overstates it. The decision between debt and equity is much more broadly factored than that argument makes it seem. Cash flow, lender support for the particular industry, general economic times and market liquidity, SEC reporting and treatment of excessive debt by market analysts–so much figures into the decision, that tax, as in so many cases in the business world, is and rightly should be only one factor among many.
While companies can try to do share repurchases in a way that will give capital gain treatment, proportionate and regular redemptions are generally treated as dividends and not as capital gains exchanges under the tax code (section 302). There are in fact a whole set of rules in the corporate tax code that try to make sure that corporations can’t get around the ordinary income treatment of dividends (except for the temporary period) with redemptions–generally called an attempt to “bail out” corporate earnings at capital gains rates.
It could be that some companies will not increase their dividends as much without the provision, but I suspect that is not a substantial effect. Companies set dividend policy in part because of the public expectations, in part because of the company’s cash flows, in part because of what significant shareholders demand. Again, tax results for shareholders are just a factor.
I’m not yet convinced that payroll tax holidays make sense, because I fear that they will serve primarily to bolster the wacky idea (being pushed by those who want to get rid of or reduce the benefits of Social Security) that Social Security is bankrupt. We can achieve the same thing–a cut targeted to those who are wage-earners in the bottom half or even bottom 60% of the income distribution–by letting the Bush tax laws apply as written (i.e., the temporary cuts expire as slated at the end of 2010) and then enacting new tax cuts targeted to that group (both in the regular tax system and the AMT system). This idea, I meant to indicate in my post, is one that others have pushed as well. See, e.g., Robert Reich, Why Democrats should propose a “people’s tax cut”, Salon.com, Aug. 24, 2010, at http://www.salon.com/print.html?URL=/news/feature/2010/08/24/bush_tax_cut_end
Linda: “I’m not yet convinced that payroll tax holidays make sense, because I fear that they will serve primarily to bolster the wacky idea (being pushed by those who want to get rid of or reduce the benefits of Social Security) that Social Security is bankrupt.”
Not if the Trust Fund is credited with the taxes that would have been paid. That’s how to do it, anyway.
Linda: “We can achieve the same thing–a cut targeted to those who are wage-earners in the bottom half or even bottom 60% of the income distribution–by letting the Bush tax laws apply as written (i.e., the temporary cuts expire as slated at the end of 2010) and then enacting new tax cuts targeted to that group (both in the regular tax system and the AMT system).”
Don’t a lot of people pay more in payroll tax than income tax? How do you cut their taxes by the amount of their payroll tax by cutting only their income tax? Make their income tax negative?
The point isn’t just to cut taxes, but to cut taxes for people who will actually spend money.
I do believe that the USG is rapidly running out of tax cut candy to hand out. I don’t think the dems have any choice but to let the Bush cuts expire in their entirety because the R’s will block any other mod to it. Similarly they would probably successfully block a new plan for the Little Peoples.
So we still have that pesky problem of AD. But then again if people were using their house as an ATM and using the proceeds to go out to eat, how real was that? Maybe we just have to live with the fact that our restaurant economy takes a hit. Plus it is apparent that much of our recent stimulus attempts leaked out of the country to China, the Middle East and maybe Germany for those who can afford their stuff. That’s probably where much of the Bush tax cuts for upper, middle and lower peoples went too.
I get worried when they may kill the 90% to save the 10% unemployed, especially if many of those jobs are second or third income jobs in a household. Even more so if what they do doesn’t save the 10%.
Not to say that plenty of work could be done in the tax code with loopholes and corporate welfare.
On of my pet peeves is early in the Bush admin Sec Treasurer Snow created a commission to study the tax code. Their main recommendation was to reduce or eliminate the mortgage deduction (not surprising since the members were drawn from industry). Back then there was some chance that could be done without throwing everyone into the poorhouse, but Bush canned that recommendation too. Forget that one nowadays.
We are in a box we can’t get out of.
Proposals I have seen from the WH are the employers share…?
Summers, Geithner, et al., are Republicans Lite.
Cedric Regula: “We are in a box we can’t get out of.”
Our only constraints are political.
Ha!……..Yep….Just like Rush and the Tea Party are Democrat mouth pieces. Good One!