January 30, 2003 | Commentary on Taxes
Ed013003c: Tax Reform Benefits Everyone
We could learn something from France and Germany.
No, not on Iraq. Both nations, alas, seem content to let Saddam
Hussein play cat-and-mouse games with U.N. weapons inspectors. But
when it comes to taxes, they made a move more than a decade ago
that U.S. policy-makers would do well to emulate: They cut taxes on
Here's one area France and Germany agree with President Bush. He
has included a dividend tax cut in his latest economic proposal,
confident that it will spark long-term growth. In fact, the
president goes our European allies one better, saying we should
eliminate altogether the second layer of taxation that our
government imposes on corporate earnings.
Critics say such a move would help only the rich. But ending the
double taxation of dividends would benefit millions of Americans,
not just an elite class of investors. Stock ownership is much more
common today than it used to be. Roughly 84 million Americans now
own equities, either directly or in tax-deferred retirement
It's true that, under the Bush plan, people with equities in
retirement plans wouldn't receive tax credits for their dividends.
But to say they gain nothing at all is misleading. A share of, say,
Microsoft stock owned in an IRA is the same as a share of Microsoft
owned directly. If stock prices rise as a result of a dividend tax
cut -- and that's exactly what we can expect -- then every
individual who owns stock, directly or through a retirement plan,
But we'll get more than just higher stock prices if we end the
double taxation of dividends. Eliminating this extra burden on
capital income will prompt economic growth. Once corporate managers
can obtain funds less expensively, they'll have more capital to
invest -- and therefore more jobs to offer.
I say "corporate managers," not "corporations," for a reason. It's
easy to forget that a wide array of people pay for "corporate"
taxes in one form or another. From wealthy investors to hourly wage
earners, many individuals shoulder the burden of corporate taxes.
When taxes are high, corporations have less money to pay their
workers -- and consumers are stuck with higher prices. Focusing on
"corporations paying their fair share" is clearly misguided.
The same is true of other clichéd class warfare arguments.
Take the charge that fundamental tax reform benefits "only the
rich." Assuming that we can even agree on who "the rich" are, what
is it they do with their money that hurts others? Our economy
benefits whenever anyone, regardless of income level, has more
money to save, invest and spend.
Of course, getting that extra money can be tricky under our tax
system. As Americans earn more money, the government takes more of
the next dollar they earn. For instance, when a single taxpayer's
annual income goes from $27,000 to $28,000, his or her top marginal
tax rate rises from 15 percent to 27 percent. In this case, instead
of keeping 85 percent of the last $50 they earn, they keep only 73
percent, an amount equal to about $36.
Looked at differently, to actually keep that last $50 after taxes,
this taxpayer now has to earn almost $70. In other words, this
taxpayer must spend more time working for the government if he or
she wants to keep that last $50. Since the tax rates rise with
income (and certain deductions are phased out), the amount of extra
work needed rises with income, making it even harder to keep the
next dollar earned.
As President Bush said in his State of the Union address, "the best
and fairest way to make sure Americans have [more] money is not to
tax it away in the first place." Fundamental tax reform will allow
all Americans to keep more of their money instead of sending it to
Washington, and dividend tax relief is an important part of such
reform. After all, France can't be wrong about everything.
Michel is a policy analyst in the Center for Data Analysis
at The Heritage Foundation (www.heritage.org).
Distributed nationally on the Knight-Ridder Tribune wire