Someone explain THIS to me.

[Aragorn]

Supposedly cutting taxes on dividends is supposed to spur investment. I don't see how. If companies pay more dividends, they keep less of their earnings to invest in new plant and R&D. It seems that encouraging companies to pay more dividends means LESS investment.

And encouraging people to invest in the market does not increase investment by companies. Basically it shifts money from one investor to another. And it shifts money away from corporate bonds which is a way companies use to raise capital. Barring issuing new shares, investing in the stock market does not raise capital for companies.

So how does lowering taxes on dividends increase investment?

[adios]

I'd answer that cutting taxes on dividends isn't about spurring investment (perhaps marginally) but rather it's an issue of fairness and possibly an issue about corporate governance. First of all let's be clear on one thing, not all dividends are included in the new tax treatment. Dividends from Real Estate Investment Trusts are subject to taxes at the appropriate marginal rate of the individual receiving them i.e. they're taxed as ordinary income. Why? Because profits from Real Estate Investment Trusts (REITs) are NOT taxed at the corporate level as long as the REIT maintains it's REIT status. However, the profits of a JP Morgan are taxed at the corporate level. The shareholders are basically the owners of the company and are entitled to the profits. When company profits are taxed at the corporate level and then taxed again when distributed to share holders this phenomona is called "dobule taxation." Other business organizations like partnerships and sole proprieterships have their profits only taxed once which is one advantage they have to corporations (although corporations have many unique advantages as business entities). I realize that double taxation occurs in other instances but that doesn't make double taxation fair. I'll leave corporate governance issues for another post as I've gotta go.

[Aragorn]

You can definitely make a case based on the fairness issue, but for the most part that was not the justification made for cutting taxes on dividends. Most of those in favor said it would increase investment and create new jobs. I am still not sure how it will do this.

And if you want to eliminate double taxation, you should do just that, not the Mickey Mouse combination of expiring tax cuts.

Personally, I think the tax code is such a mess of provisions, that eliminating a particular unfair provision doesn't buy much. And I am not sure who it is unfair to.

BTW, our whole system is basically a transfer of wealth from the young to the old. We tax young people, who have the least to pay for huge benefits for the old who tend to be wealthier. It's a crazy idea, but old people vote.

[Ray Zee]

you want high dividend stocks. in days past companies that didnt pay dividends invested back into the company for growth. in present day the manageers of big companies just see dollars for themselves. and if a company gets excess money they find a way to syphon it off for themselves. you want to get it so they cant use it for their own agenda. if you dont think i am right on this thats okay.

[adios]

"You can definitely make a case based on the fairness issue, but for the most part that was not the justification made for cutting taxes on dividends. Most of those in favor said it would increase investment and create new jobs. I am still not sure how it will do this.

And if you want to eliminate double taxation, you should do just that, not the Mickey Mouse combination of expiring tax cuts."

Ok points well taken, I'd say more if I was on other topics forum /forums/images/icons/laugh.gif.

"Personally, I think the tax code is such a mess of provisions, that eliminating a particular unfair provision doesn't buy much. And I am not sure who it is unfair to."

Doesn't mean that eliminating an unfairness is a bad thing though.

"BTW, our whole system is basically a transfer of wealth from the young to the old. We tax young people, who have the least to pay for huge benefits for the old who tend to be wealthier. It's a crazy idea, but old people vote. "

Sorry can't let this one slide. This statement is way, way wrong. Note the excerpt from the following URL which points to a Wall Street Journal op-ed article about taxes:

"We are merely pointing out the (apparently heretical) truth that the current tax system is very skewed against upper-income Americans. According to IRS data from 2000, the top 5% of tax filers paid more than 50% of total income tax revenue, and the top half of tax filers were responsible for almost all revenue--96% of the total take. This burden on the upper-income holds even when the payroll tax is included in overall distribution tables. (The payroll tax includes the regressive Social Security levy and the 1.45% Medicare tax that applies to every dollar of income.)

The Congressional Budget Office has looked at the distributive impact of various taxes for 1997. The income-tax share of the lowest-income family quintile (the bottom 20%) was negative 1.2% and the share of the highest family quintile was 73.3%. The difference in payroll-tax share was somewhat less dramatic at 3.9% for the lowest quintile and 40.6% for the highest. But when all federal taxes were thrown together, the share of the lowest quintile was 1.6%, while the share of the highest quintile was 60.2%. Karl Marx, call your office."


Lucky Duckies Again (http://www.opinionjournal.com/editorial/feature.html?id=110002938)


Here's a re-print of another WSJ op-ed piece about the new tax law and who pays taxes.

Even Luckier Duckies

The new tax bill exempts another theree million-plus low-income workers from any federal tax liability whatsoever, so be pleased. But instead we are all now being treated to their outrage becuase the law doesn't go further and "cut" income taxes for theose who don't pay them.

This is the essence of the uproar over the shape of the child-care tax crecit. The tax bill the President signed last week increases the per child federal income tax credit to $1,000, up from the partially refundable $600 credit passed in the 2001 tax bill. But Republican conferees decided that the increase will not be paid ou to those too poor to have any tax liability to begin with.

Most Americans probably don't realize that it is possible to cut taxes beyond zero. But then they don't live in Washington, where politicians regularly demand that tax credits be made "refundable," which means that the government writes a check to people whose income after deductions is too low to owe any taxes. In more honest precints, this might even be called "welfare."

But among tax cut oponents it is a political spninning opportunity, "Simply unconscionable," says Presidential hopeful John Kerry. The Democratic National Committee declare that "Bush tax scheme leaves millions of children out in the cold ... one out of every siz children under the age of 18, families and children pushed aside to make room for the massive tax cuts to the wealthy."

Senator Olympia Snowe, the media's favorite Republican now that John McCain isn't actively running for President, says she is "dismayed." "I don't know why they would cut that out of the bill." adds Senstor Blanceh Lincoln (D. Ark.). Those last two remarks take chutzpah, because if either woman had been willing to vote for the tax bill, a refundability provision would have been in it.

Senator Lincoln introduced the idea in the Senate Finance Committee, but then announced she wasn't going to vote for the bill anyway. Ms. Snowe was also one of those, along wiht Senator George Voinivich (R., Ohio), who insisted that the bill's total "cost"- in tax cuts and new spending-not exceed $350 billion. Something had to give in House-Senate conference to meet that dollar limit, and out went refundability. The bill passed by a single Senate vote, with Vice President Dick Cheney breaking the tie.

As it happens, the tax bill does a great deal for low-income families even without the refundable child credit additon. It expands the 10% income tax bracket, meaning that workers can earn more before leaping ito the 15% and 25% brackets. This is a far better way to provide a tax cut than is a refundable credit, because it lowers the high marginal-tax rate wall that these workers face as their credits phase out at higher income levels.

There's alos $10 billion in the bill earmarked for Medicaid, the state-federal health insurance program for the poor. And any family that actually has remaining tax liability benefits from the extra $400 child tax credit.

More braodly, the critics want everyone to forget how steeply progressive the tax code already is. IRS data released lat year show that the top 1% of earners paid 37.4% of all federal incomes taxes in 2000. The top 5% paid 56.5% of federal taxes,and the top half of all earners paid 96.1%. In other words, even before President Bush started slashing taxes on the poor by increasing the child tax credit in 2001, the bottom 50% of filers had next to no federal income tax liability.

But don't low-income workers have to cough up the payroll tax? They certainly do, but don't forget that the federal Earned Income Tax Credit was designed to offset payroll taxes and is also "refundable." In 2000, the EITC totaled $31.8 billion for 19.2 million Americans, for an average credit of $1,658. Some 86% of that went to workers who had little or no income tax liability.

Republicans who just voted for the tax cut might be less defensive and try to explain all of this. But instead too many of them are heading for the tall grass, with Senate Finane Chairman Chuck Grassley already promising to cave as early as this week on the child tax credit. This is the kind of political box Republicans walk into when they endorse tax credits that favor one group over another. Democrats are better at playing favorites.

We raised some hackles last year when we noted this growing trend that more and more Americans paid little or no tax. "Lucky duckies," we called this non-taxpaying class at the time. Notwithstanding liberal spinners, after this tax bill they're even luckier.