The Taxonomist: New Gang, Old Myths

When George W. Bush hired a new economic team in early December, the press speculated that the change might bring a glimmer of fiscal sanity to the administration's economic policies. Don't bet on it. As Stephen Moore of the anti-tax, big-deficit Club for Growth cult put it, whatever their past records, the new boys will "drink the Kool-Aid." And sadly, our president will keep proposing the same solution to every problem: more tax cuts for the rich. So here are a few things to keep in mind as this year's tax debate unfolds.

The myth of the "double taxation of dividends." The newest item on Bush's tax-cut agenda is to reduce or end taxes on dividends. This could be very expensive, not to mention hugely regressive. Most of the $25 billion a year in tax cuts from wiping out personal income taxes on dividends would go to the best-off 1 percent of the population.

In defense of this latest upper-income giveaway, Bush invokes tax equity. Corporate profits are unfairly "double-taxed," he says, first when companies earn them and second when they're distributed to shareholders as dividends. This argument, however, has two defects: It's conceptually unsound and it's factually untrue.

When you think about it, the number of times something is taxed isn't an enlightening concept. Instead, it's the total amount of taxes, whatever the number of levels, that matters. Who wouldn't feel better, for instance, about paying two taxes of 10 percent each rather than a single tax of 40 percent?

So the real question is: Does the so-called double tax on corporate profits cause them to be overtaxed compared with other kinds of income? It sure doesn't look that way.

Corporations have become extremely agile and aggressive at avoiding the corporate income tax. Consider CSX, the company run by Bush's choice for Treasury secretary, John Snow. Snow brags, in CSX's latest annual report, that his firm "pursue[s] all available opportunities to pay the lowest federal, state and foreign taxes ... [and] works through the legislative process for lower tax rates." As a result of all that clever accounting and lobbying, CSX paid nothing at all in federal income taxes on its $934 million in U.S. profits over the past four years. Instead, it got tax rebate checks from the Treasury totaling $164 million. Obviously, CSX's profits can't possibly be double taxed.

CSX's tax dodging may be particularly egregious, but most other companies do their darnedest to avoid taxes, too. Last year, less than half of actual total corporate profits were subject to corporate income tax. And most dividends are tax-exempt, too, because they're paid to pension funds and tax-exempt retirement accounts. Bottom line: Last year, barely more than half of corporate profits were subject to tax at any level. So the double tax doesn't come close to taxing corporate profits even once.

If at first you don't succeed, make the same mistake again. The so-called stimulus bill enacted in January of 2002 showered $114 billion in new tax breaks on corporations over three years, supposedly to encourage more investment. It was an odd approach, given that overcapacity and lack of demand were -- and are -- our problems. The Business Roundtable, which represents the country's 200 largest corporations (who got most of that money), sadly reported this November that three-fifths of its members plan to lay off workers in 2003, and more than 80 percent will not increase their plant and equipment investments. Those failed business giveaways were enacted in lieu of a stimulus package that might have actually done some good by putting money in the pockets of consumers who'd spend it.

Cutting taxes in 2011 to spur the economy now? The other major item in Bush's tax package would extend his 2001 tax cuts past their scheduled 2010 sunset date. The president's argument is that rich people will work harder and save more now if they're assured of tax cuts in 2011 and 2012. This argument seems perfectly stupid to me, but it's the one dearest to the president's supply-side heart.

Finally, Bush's previous tax cuts have already helped produce a pretty stimulative fiscal policy. Federal deficits outside of Social Security are likely to exceed 3 percent of the gross domestic product this year -- considerably more if we go to war. But because of the president's warped priorities, we've gotten very limited bang for the buck from all those stimulus dollars. We could do something more useful to spur the economy, but to afford it, we'll first have to repeal some of Bush's costly mistakes.

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