Remora

LI believes that the first question about taxes should be: what are they buying? In the case of the current administration, there seems to be a desire to buy quite a lot, including a war. On the other hand, there is also the Enron philosophy to which Bush and Cheney subscribe. That is, they believe the company exists to reward its upper tier management -- or, in the case of a company nation, its upper class. So they seem willing to employ certain Enron accounting tactics to do this. Enron would give bonuses to its management based on projected profits -- profits that most often didn't materialize. Thus, Rebecca Mark, for instance, was rewarded with tens of millions of dollars for running projects that lost billions of dollars. In the same way, the Bush administration has apparently decided to destroy any progressivity in the tax system to reward the already inordinately rewarded top tier of the wealthy in this country. The proposal to end the dividend tax is a trademark Enron deal. It will lose the country billions of dollars, it will reward an investing class billions of dollars, and it will produce very little wealth for the rest of us. In fact, it will take away wealth from the bottom forty percent. Why?


Well, by now we have a history of de-regulating financial capital and assuring investors of greater returns on their investments by creating a panoply of tax dodges and lowering taxes generally on the upper income percentile. This creates incentives for investing in those enterprises with the greatest immediate returns. These are not synonymous with those enterprises that employ the greatest number of people. Take energy. After the wild ride of de-regulating energy and allowing a de-regulated energy market, what are we finding? That energy companies are still steady, but slow, profit generators. The earnings growth that you can pump out of them is never going to match the earnings growth you can pump out of, say, Microsoft ... unless you screw around with the numbers. To try to grow a power company at twenty percent per year is like trying to grow a rubber plant into a redwood. It ain't going to happen. However, if you encourage investors to expect the kind of returns you get from the de-regulated markets of the nineties, you'll get the same shenanigans of the nineties, as all sectors compete, desperately, to attract investors.

Which is just another way of saying that treating the de-regulation, and the de-taxing, of the financial sector as if that sector invested neutrally is nuts.

The tax policy center has a nice data base that compares the tax brackets from 1940 to 2002. In 1950, which might be the epicenter of New Deal America, incomes above 400,000 dollars paid an 84 % tax. Theoretically, of course.  Still, the attempt was being made to curb excessive wealth. That same income bracket, in 2002, paid (again theoretically) 34%.  Meanwhile, the corporate income tax contribution to the U.S. budget has been steadily dropping. According to this U.S. News article :


"The corporate levy�which raised $151 billion last year, down from $207 billion in 2000 when profits were easier to come by�may be an endangered species in its current form. Last year's take was the lowest since 1994 and accounted for only 7.6 percent of federal revenue, down from 26.5 percent in 1950. Individuals, meanwhile, are picking up a bigger share of the income tax burden. In 1950, corporations kicked in 39.9 percent of the total collected, while individuals ponied up 60.1 percent. Last year, corporations paid 13.2 percent, while individuals forked over the remaining 86.8 percent."



Any progressive party in this country should take account of these stats and ask what happened. That isn't all --- what Bush is proposing, now, is, in an odd way, a response to these statistics. It is a form of conservative progressivism. It would be hard to justify cuttng the corporate income tax rate further -- although of course the conservative argument, out there, is that since the corporate rate has been cut so much that it only amounts to 7.6 percent of federal revenue, why not cut it to zero and let companies use that money to employ people. Still, the affection people at large feel for corporations is much colder than the affection for them felt by the likes of Bush and Cheney. The elimination of the dividend tax is a covert way of achieving a massive tax cut for the people who own corporations.



That said, there are parts of the tax cut that make sense, or would make sense in some form, especially given the losses of the last three years to the retirement funds of average income Americans.



We'll go into this more in our next post.

NYT publishes a helpful Q. and A. about the Bush proposal.


Q. So what's this "double taxation" everyone's talking about?







A. That term can be a little misleading. A company does not raise its tax burden simply by deciding to pay dividends. But companies have to pay their own income taxes before they can pay dividends.



The federal and state governments tax as much as 40 cents of every dollar in a company's profit. If the remaining 60 cents is paid to shareholders as a dividend, the governments may collect about 24 cents more � 40 percent again � as personal taxes. Most companies, of course, retain much, if not all, of their profit to reinvest in their business. But of the share that is paid to taxable owners, as little as 36 cents of every dollar in profit goes into their pockets.



By contrast, interest on debt counts as a cost, and companies pay interest out of pretax revenue. That gives many companies an incentive to hoard cash or borrow rather than distribute profits to stockholders in cash.