RUSS ROBERTS

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Cut Taxes, Help the Rich (And the rest of us too)

Text from National Public Radio, Morning Edition – Audio

A lot of people seem to think that the Bush stimulus plan is just a way for the President to pay off some of his fat cat friends.

Could be. But for those who always assume the worst about this President, I have two words: Jimmy Carter.

Jimmy Carter also supported the centerpiece of the Bush plan, the elimination of the tax on dividend income.

Wow. Who knew that Carter had a secret agenda for helping his fat cat friends? Or maybe there’s another reason for cutting taxes on dividend income. Actually, for over fifty years, prominent economists have opposed taxing dividend income and the so-called double taxation of corporate earnings.

The President’s plan increases how much investors get to keep, after-tax, from investing in successful companies. That makes it easier for corporations to raise money for risky investments. That gives corporations more machinery and capital to work with, boosting productivity and wages.

That’s the idea, anyway. The President’s plan also makes it more attractive for corporations to pay out the profits from successful investments to shareholders in the form of dividends. Those corporations already paying dividends will have an incentive to increase them.

Increasing the use of dividends should reduce the kind of accounting shenanigans we’ve seen lately. It’s one thing to have high profits on paper based on an arcane Caribbean partnership. But you can’t pay a dividend out of a paper profit. You need to earn real cash. So dividends encourage credible accounting.

That’s one reason why the Carter administration dropped the idea of eliminating the tax on dividends. Big business wanted a murkier playing field, earnings kept inside the company for CEOs to play with rather than paying them out to shareholders. CEOs didn’t want the pressure of having to make dividend payments. Sure they could choose not to offer dividends. But the companies knew that if dividends were tax-free to investors, there would be pressure from investors to offer dividends as a way of proving a company’s reliability.

Getting rid of the taxation of dividends will make some rich people richer. But it will also make the rest of us richer too. Not just those of us who happen to invest in dividend paying stocks. The real gain will an increase in investment that will raise our wages and our standard of living. Will it fix the sluggishness of today’s economy? Probably not. For that, we’re going to have to resolve the situation with Iraq.

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