Battling for dividend tax relief
1/21/2003 12:00:00 AM - Bruce Bartlett
Last week, I had the opportunity to debate the estate tax with
Bill Gates Sr., father of the Microsoft founder. He was in Washington to
promote a new book he has co-authored on why the estate tax should be kept
and not abolished in 2010, as current law dictates.
Gates has become the spokesman for a movement that believes the
estate tax is not only an appropriate part of our tax system, but a highly
desirable one. His argument, basically, is that the wealthy benefit a great
deal from a stable government that keeps the peace, enforces contracts,
trains the workers that business needs and conducts much basic research in
areas such as biotechnology that has given rise to many great fortunes.
Therefore, Gates says, the wealthy should give something back to
society when they are gone. Anyway, giving a lot of money to your children
often ruins their lives, and the government needs the revenue from the
Gates concedes that the estate tax needed reform. In particular,
he admits that the $600,000 exemption level that existed before the repeal
movement got going was much too low. Gates says that we should exempt $7
million of an estate from taxation, but have some sort of tax on the
Those like Gates who wish to keep the estate tax know that they
are playing catch-up. Had they come forward with a reasonable proposal for
exempting the first $7 million of an estate three or four years ago, it may
have taken all the wind out of the sails of the repeal movement and
preserved the estate tax in law. But supporters of the estate tax refused to
compromise when compromise was viable politically. Now it is too late.
With estate tax repeal already in law, those favoring abolition
hold the high cards. Their only weak spot is a screwy Senate rule that
prevented permanent abolition of the estate tax when the law was passed in
2001. Because of this rule, tax cuts could only be enacted for 10 years. As
a result, the estate tax comes back in 2011, after ceasing to exist for just
To estate tax supporters, revival of the tax in 8 years is their
life raft. They are hoping to convince Congress not to extend repeal beyond
2010. Of course, supporters of repeal will use every legislative opportunity
to make repeal permanent. If they do not succeed in doing so this year, they
can probably extend repeal by two more years. As time goes by, permanent
repeal becomes closer to final enactment.
What this experience teaches is something very important, not
just about tax policy but about the policymaking process. It shows that
fighting for a principle, even if it seems absurdly unachievable, can be
very good politics. By asking for far more than anyone thought was
realistically possible, supporters of estate tax repeal changed the
political dynamics, thereby forcing estate tax supporters to make
concessions that they steadfastly opposed previously.
Fighting for a principle energizes your own supporters in a way
that asking for something more politically realistic does not. It also gives
you a chance to compromise, if necessary, from a position of strength. In
the end, it is the other side that does most of the compromising. And you
can always come back and ask for more another day.
President Bush seems to have learned these lessons from the
estate tax fight with his proposal to eliminate taxes on corporate
dividends. By all accounts, he was set to propose a 50 percent exclusion for
dividends. But at the last minute, President Bush decided to ask for total
elimination of taxes on dividends and defend the policy as a matter of
principle, rather than as just an effort to stimulate the economy.
This decision dramatically changed the terms of debate. Instead
of debating whether lower taxes on dividends will stimulate growth -- a
debate the administration might well lose, since it probably won't stimulate
growth much in the short-run -- the debate has mainly been about whether
double taxation of corporate profits is proper tax policy per se. The result
is that Bush's opponents are essentially arguing on his turf. As a
consequence, it appears almost inevitable that some sort of dividend relief
will be enacted even if total elimination of taxes on dividends is not
Had the administration started out asking for just a 50 percent
exclusion, I would not be as optimistic. The lesson here is that if you ask
for a full loaf, you are more likely to end up with at least half a loaf.
Whereas, if you start out asking for half a loaf, you may end up with