Wednesday, November 09, 2005

More Tax Week

Or "How I Bored my Readers to Tears, Part II"

     I'm not going to make a secret that I'm one of those crazy, nerdy people who enjoy taxes. Not paying them, exactly, but understanding the nuances and motivations and real-world effects. Still, if you're one of the other 99.999% of Americans whose eyes glaze over when someone mentions "itemized deductions" or "deferred capital gains", you're the target audience of a government panel empowered to make decisions about the future of the IRS. Because they're hoping you are going to pay attention so little to their proposals that they'll be able to get away with anything.
     Yesterday I talked about one of their proposals - a change to the mortgage interest deduction. Today I want to address another proposal - the one to change how dividends are taxed. And while I generally approved with the mortgage recommendations, I don't exactly feel the same way about the dividend recommendations.
     The President's tax panel proposed making dividends from domestic earnings tax free. Yes, that's right. If you're a trust-fund baby, you might pay no income taxes whatsoever. How's that for a kick in the pants? (And by pants, I mean ass) Not only do poor and middle-class people have to spend 40-80 hours a week working to make enough money to live, they may also soon get to pay all of the income tax collected. What a great deal! Hey, it's your own damn fault for not being born rich, you slacker hippie! Get (another) job!
     OK - nobody else but me is saying this, as far as I can tell. But lets dig in a little further. Currently most companies pay a very small amount of dividends relative to their share price. UPS, for example, pays like 35 cents every three months per $75 share. The old (2003) reason for cutting dividend taxes down to 15% was because Bush claimed money was being "double-taxed", a phrase that has about as much real meaning as "liberal" and "activist judge". People, your money isn't being "double-taxed". It's being taxed hundreds of times! You earn it, it's income-taxed. You buy a house with it, it's sales-taxed. You hold onto the house, it's property-taxed. You sell the house, it's capital gains-taxed and the buyer pays sales tax. And the whole stupid cycle starts over again. That's what taxes are - a mechanism to give money to the government so it can operate. Some people pay more taxes than others. Maybe it's because they make more money than others. Maybe it's because they engage in more activities that are taxable. Maybe they just have a bad accountant. It's just life, and if you don't like it, email me and I'll send you the name of a good anarchist group in your area.
     Anyway, back to dividends - the trouble with the "double taxed" idea is that many corporations pay little or no income tax, even when they make a profit. If you think you found a nifty tax loophole last year, you wouldn't believe some of the loopholes corporations slip through. So if you remove tax on dividends, much of this money will be "never taxed". And that's a real problem. Because it's not like the government uses a debit card to buy things. It uses a credit card. Getting less tax doesn't mean it is spending less. And therefore it has to get the tax from somewhere else. Who benefits most from a tax cut on dividends? The wealthy. When tax revenue has to be found to replace dividend tax, do you still think the wealthy will be paying as large a proportion?
     Here's the scarier thing: my salary is a corporate expense. When my company figures out its profits, it subtracts my salary first. Then it gives dividends to shareholders from its profits. Say I owned a bookstore with 5 employees working for me. I would pay the 6 of us a salary and we would all pay income tax. Now imagine in 2006 I give all of us "shares" of the bookstore and instead of paying us a salary, I declare a huge dividend that just happens to be the same as the salary we used to get. Except now it's tax-free.
     I know - at first I thought that was awesome too. But then I started wondering, "who is going to get stuck with the bill?" Well, that will be the people unable to get such a sweetheart deal. They're the ones making $9 an hour at McDonalds or $30,000 a year at a public school. You can bet CEO's will quickly get private stock in a small subsidiary of their employer that pays $3 million dividends.
     And lets ask why dividends should be taxed lower than salary anyway. Is it more productive for Americans to spend their time day-trading or producing? Are dividends more desirable than bank interest? More than a teacher's salary or an engineer's salary? Do we really want investors demanding that companies give away all of their profit as dividends instead of investing in expansion that would power America's future?
     Dividend Tax Cut proposal Final Grade: F+


Ben said...

Is F+ better than F, so it just barely failed? Or does it mean it failed REALLY bad?

Ben said...

For the record, I think the tax reform panel is a joke. Of course I favor trashing the current tax system entirely.

Sylvana said...

Great post! I laughed, I cried, I shook my head in utter disbelief. I feel as bad as the next guy for these poor, over-burdened rich people. When is the playing field going to be leveled for them?