Tax relief politics

Posted: Sep 12, 2002 12:00 AM
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, R-Calif. 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 economic summit. 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 dividends. 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 taxation.