President Bush’s plan to eliminate the double taxation of corporate profits, by exempting dividends from taxation, appears to be on life support. Even before his tax package was reduced from $726 billion to $550 billion in the House and $350 billion in the Senate, the proposal was in trouble. Now, it looks very sick indeed.
There are many reasons for the failure of the dividend plan. It was never very well understood because the Treasury Department didn’t issue a report explaining its rationale in detail. Its principal advocate, Council of Economic Advisers Chairman Glenn Hubbard, left after being denied the job of Deputy Secretary of the Treasury. And President Bush’s attention has obviously been focused elsewhere.
But there are really two key reasons why the dividend plan never picked up traction. First is an utter lack of support in the corporate community, and second is concern that eliminating taxes on dividends may not provide much of a short-term stimulus to the economy.
The lack of support for the dividend plan among corporate executives is not surprising—in fact, it is a sign that President Bush is on the right track. They don’t want to be forced to operate their businesses for the benefit of its owners, the shareholders. They would rather continue to run them as personal fiefdoms, paying the corporation’s earnings to themselves instead of paying dividends.
One of the least well-understood reasons for President Bush’s plan is that it would help correct the corporate governance problem evidenced by the Enron, Worldcom and other scandals last year. As long as profits are double taxed, executives have a good reason not to pay dividends. But without dividends, shareholders are totally dependent on earnings reports to tell how well their investments are performing. As we now know, these proved to be too easily doctored by executives needing to hit quarterly earnings targets in order to get stock options. It was a system open to abuse.
By encouraging corporations to pay out their earnings to shareholders, the dividend plan would impose discipline on corporate executives and force them to manage on behalf of the corporation’s owners rather than themselves. Precisely for this reason, they oppose the President’s plan. But fearing a political backlash, none will say so publicly. Instead, corporate lobbyists simply did nothing to support the plan.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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