Right now, when a corporation earns a dollar of profit, it pays corporate income taxes at the rate of 35%. Then when the company pays out those already taxed profits to its shareholders, the profits are taxed again on the shareholder's personal income tax return, at a top rate of 38.6%. That's right... the simple act of licking a stamp and mailing the shareholder his own money causes that money to be taxed a second time. It's like a tax on taking money out of your left pocket and moving it to your right pocket.Ohio Senator George Voinovich, a Republican and opponent of the larget cut, and who is Bush's first target in lobbying for more support, is on record as prepared to support the full cut if we can "pay for it." I assume he means through spending cuts. This is a classic dodge, but Bush should indulge him. If we could cut taxes and spending, we could really get the economy in a full-throated hum.
Put those two taxes together, and consider what happens to a dollar in profits. At the corporate level it gets taxed down to 65 cents. Then by the time the shareholder has paid the second tax, all that's left is 40 cents! That's right -- today's double taxation amounts to a 60% tax on the fruits of investment. And that's just the federal tax -- it doesn't even include the additional taxes levied on corporations and individuals by individual states.
During the good times it seemed that America was able to get away with these prohibitively high taxes on invested capital. But now we're paying the price. Corporations learned to take on lots of debt, because interest payments to bondholders are only taxed once -- but when the 1990s boom ended, all that leverage was pure risk when the economy slipped into recession and earnings collapsed.
Friday, April 25, 2003
And Now Back to the Tax Cut: Don Luskin, over at the Conspiracy to Keep You Poor and Stupid, has a nice, succinct case for making dividend taxation reform the centerpiece of the tax package. Going with the $350 billion tax cut won't pay for it. A long quote, but worth the time: