January 8, 2003 | Commentary on Taxes
ed010803b: An Economic Plan That Adds Up
President Bush's critics reacted in predictably uniform fashion to
his latest economic proposal: Playing the class-warfare card.
Good luck making that charge stick. America isn't France. The
politics of hate-and-envy doesn't resonate here like it does in
Europe. We want more freedom and opportunity.
Consider the president's call to end the double taxation of
dividends, which is sure to give the stock market a boost and
improve American competitiveness. Under his plan, businesses will
still pay tax on corporate income, but individual stockholders no
longer would have to pay a second layer of tax on that income when
it's distributed as dividends.
There's no question that a dividend tax-cut would produce growth.
Even Marxist economists recognize that investment is the key to
long-run growth and rising wages. Yet the tax code punishes
investment by taxing the same dollar of corporate income twice.
Indeed, it's possible for the same dollar of income to be taxed up
to four times. Discarding one of these extra layers of taxation
will encourage businesses to invest more. This will lead to more
jobs and higher living standards.
It also will mean higher stock prices. The value of financial
assets is determined by how much after-tax income businesses can
expect. Removing the second tax on dividends will increase that
future income flow and therefore help the stock market. Financial
experts say the stock market could expand by about 10 percent under
the Bush plan, boosting national wealth by nearly $1 trillion --
welcome news for workers who have watched their IRAs and 401(k)
But this isn't just an economic issue. Repealing the double-tax on
dividends is the right thing to do. It's high time government
stopped imposing penalties -- or granting preferences -- depending
on how people get or spend their income.
The president's plan promises several other benefits. Under current
tax law, for instance, companies are encouraged to use debt, not
equity, to finance investments. Why? Because dividends are taxed
twice and interest on corporate bonds is taxed only once. If Mr.
Bush's plan is approved, this bias disappears and companies will
have a strong incentive to strengthen their balance sheets. This
would mean fewer bankruptcies.
The tax code also creates a perverse incentive for companies to
hoard earnings. Why? Because the double-tax on the earnings they
keep (capital gains) is lower than the double-tax on the earnings
they distribute (dividends). The president's plan would end this
anti-dividend bias, giving companies an incentive to attract
investors by offering dividends instead of promising capital gains.
This would improve corporate governance (fewer Enrons, anyone?)
since firms no longer would feel as much pressure to boost share
prices by making unwarranted claims about future revenue. Instead,
investors would judge a company by the amount of cold, hard cash it
pays its shareholders.
Perhaps most importantly, the Bush plan also would boost U.S.
competitiveness abroad. According to a Cato Institute survey, only
three of the world's 30 developed nations -- America, Switzerland
and Ireland -- double-tax corporate income. And since Switzerland
and Ireland have lower corporate tax rates, this means America has
the most punitive and anti-growth dividend tax in the
This is an embarrassment -- and it clearly puts America in a
disadvantageous position. About one-fourth of our competitors don't
impose any double-taxation on dividends, while almost all the rest
have policies that provide at least partial protection from
double-taxation. By ending the double-taxation of dividends,
President Bush hopes to bring America from last place to first
place in this critical measure of global competition. This means
more jobs for American workers and more capital for American
Of course, the president's opponents began criticizing the proposal
before it was even introduced. But their class-warfare arguments
don't make much sense in a global economy. You don't help the poor
by imposing high taxes on the rich. Such policies simply drive
money from the U.S. economy and benefit our competitors.
Other critics claim that tax cuts will explode the deficit -- a
classic cart-before-the-horse argument. As President Kennedy
explained more than 40 years ago, the purpose of cutting taxes is
not to incur a deficit, but to achieve the more prosperous,
expanding economy that can bring a surplus.
President Bush understands that economic growth is the first
priority. His plan to eliminate the double-tax on dividends is a
bold and visionary step. His plan will make our nation stronger and
improve the living standards of all Americans.
J. Mitchell, Ph.D., is the McKenna Fellow in political
economy at The Heritage Foundation, a Washington-based public
policy research institute.
Distributed nationally on the Knight-Ridder Tribune wire