Tax relief politics
9/12/2002 12:00:00 AM - Bruce Bartlett
On Sept. 9, columnist Robert Novak reported that President
Bush's proposed investor tax relief plan was dead on Capitol Hill due to
opposition from House Ways and Means Committee Chairman Bill Thomas,
My own reporting confirmed that there was a lack of support on
the committee for another tax bill this year. This is mainly due to fears
about losing revenue at a time when the budget has moved from surplus to
deficit. However, I found no indication that Thomas was opposed to investor
tax relief. Rather, he feared bringing up a bill that would not even pass
out of committee because of a lack of Republican votes.
I think there is no doubt that strong White House support for a
new tax package would at least ensure unified Republican support in
Congress. The problem is that there is nothing to support. The White House
has yet to put forward an actual plan. All we have on the record at this
point are some brief comments Bush made to reporters following his Waco
White House staff insists to me that the tax package is not dead
and that work on it is continuing. They expect some formal statement by the
president in the next week or so. Unfortunately, in the meantime Congress
comes ever closer to adjournment for the year, with much work on
appropriations bills still to be done. Nevertheless, I still think that a
tax package aimed at the investor class would be of great benefit to
Republican candidates in November.
Bush mentioned several tax initiatives, including increased
deductions for capital losses, and 401(k) and IRA contributions. However,
his suggestion that the double taxation of corporate profits should be
relieved probably has the greatest political potential.
Economists have complained for decades about how corporate
profits are taxed once at the company level and again when paid out to
shareholders. The result is that businesses organized as "C" corporations
pay an extra tax of 35 percent that is not paid by sole proprietorships,
partnerships or "S" corporations. (The last is a special type of corporation
for small businesses.) There is simply no logic as to why two equally
profitable businesses should be taxed differently solely on the basis of
their legal form of organization.
As a consequence, the number of "C" corporations has been
falling as a share of all business in the United States. Between 1978 and
1998, the number of non-farm businesses roughly doubled from 12.5 million to
24.1 million. However, the number of "C" corporations increased by just
363,000. Almost all of the growth, therefore, was in businesses that do not
face double taxation.
There are a number of ways that double taxation of corporations
could be relieved. One way would be to allow dividends to be deducted from
corporate income, as interest payments now are. Another way would be to
allow shareholders to receive dividends tax-free.
In all likelihood, the administration will go with the latter.
Even though the two methods are economically equivalent, those who make up
distribution tables would show the first being more beneficial to the "rich"
than the second.
In any case, the administration is unlikely to propose full
elimination of double taxation -- although Rep. Christopher Cox, Calif., has
already done so (H.R. 5323). It will probably propose a partial dividend
exclusion such as that which existed from 1954 to 1986. During that time,
individuals were allowed to receive $100 of dividends tax-free; couples
filing jointly could get $200. Had these amounts been indexed to inflation,
individuals today would be able to receive $670 of dividends tax free, with
couples getting $1,340.
Despite the fact that dividend tax relief will be limited, the
class warfare crowd will still claim that any reduction in taxes on
dividends is a giveaway to the rich. However, IRS data show that those with
modest incomes get a lot more dividends than one might imagine. In 2000,
taxpayers with less than $20,000 in income received more than $10 billion in
dividends -- 16 percent of all dividends received. Those with incomes under
$30,000 represent 30 percent of all taxpayers with dividend income.
A key reason why so many with modest incomes receive dividends
is that a lot of them are the elderly. They buy dividend-paying stocks for
income, whereas younger stockholders are more inclined to buy so-called
growth stocks that often pay no dividends at all. Instead, they get their
profits in the form of capital gains, which are more lightly taxed than
If Bush does come forward with a dividend-relief proposal, he
should make clear that this is just one step toward full abolition of double