More Fuzzy Math: Sloan
makes his New Year’s prediction at the end of his Scrooge analysis of the Bush Economic
Plan. (Color, allcaps, italics
mine). KWC
Adding Up the Stimulus
Plan
How would cutting personal taxes on dividend income give a
boost to the economy? It would take a three carom wishful thinking shot By Allan Sloan
in Newsweek @ http://www.msnbc.com/news/847663.asp?0cv=CB30#TOP Dec. 23 issue —
If there’s one thing
we’re supposed to have learned from this year of business scandals and
disasters, it’s the danger of believing numbers that are too good to be true.
The Enron and WorldCom implosions are about made-up math, as is the uproar over
Wall Street’s overly optimistic analysts. Yet despite these object lessons, it
looks like we’re about to get suckered
by another combination of wishful thinking supported by nonsensical numbers. I’m talking about
the proposal to stimulate the economy by cutting personal income taxes on
dividend income. Supporters
include President George W. Bush, Charles Schwab, various business groups and such liberals as Sen. John Kerry.
Cutting taxes on dividends is generally paired as an economic stimulator
with a “tax holiday” that would eliminate payroll taxes on
the first $10,000 of salary that people earn next year. Both ideas seem likely to be part of
White House stimulus proposals. (A
White House spokesman said last week that no decisions have been made.) But even though these items are often mentioned in the same breath, they don’t deserve equal billing when it comes to stimulating the economy. That
is, unless you’re talking about stimulating the economy of the handful of
households with significant dividend income. You don’t have
to be an economics Ph.D. to see how a one-time reduction in Social Security and
Medicare taxes could give the economy a shot of adrenaline. Much of the money—$765 each for employees and employers—would be spent quickly, particularly by
lower-income households, which would get the bulk of the $101 billion windfall.
(That statistic comes from the Brookings Institution, whose numbers I’m
using throughout.) Employers would also save $101 billion, but are much less likely to run out and spend
it. I don’t know if this one-time
tax holiday would work the way it’s intended to. But it’s got a lot better
chance of stimulating the economy than reducing personal taxes on
dividends. For starters,
the folks pushing this plan aren’t talking about dividends from money-market
mutual funds or bond funds. They’re talking only about dividends that you get directly from a
corporation, or the part of your mutual-fund distributions that are
attributable to such dividends. Personal
taxes on these amount to only about $25 billion a year, because many corporate dividends go to tax-exempt stockholders, such as pension funds and 401(k)
accounts. In a $10
trillion economy, $25 billion isn’t all that much. Besides, most of the tax savings would flow to a relative
handful of households—the top 2.3 percent pay 53 percent of dividend taxes—that
aren’t likely to spend the money quickly, and maybe not at all. What’s more, it would take until 2004, when people file their 2003 tax returns,
for most of the impact to be felt, in the form of lower checks to the IRS (or
larger refunds). So how would
this stimulate the economy today?
Watch this three-carom, wishful-thinking shot. Cutting
dividend taxes would boost stock prices sharply. Higher stock prices make it cheaper for
companies to raise capital. Cheaper capital leads companies to expand more than they
otherwise would, stimulating the economy. R. Glenn
Hubbard,
chairman of the president’s council of economic advisers, has argued in the
past that eliminating personal-dividend taxes would boost the stock market by
20 percent. This may be true in
someone’s computer model, but not in the real
world. The White House wouldn’t let me talk to
Hubbard: “When the president makes
a decision, we’d certainly be happy to discuss the reasoning behind the items,
” a spokesman said. So we’re on our own. HERE
GOES. Stocks of U.S. companies are currently
worth around $8.4 trillion. A 20
percent increase would be $1.7 trillion.
Eliminating the dividend tax, as we’ve seen, would save taxpayers $25
billion. Do the math, and each dollar of tax savings is supposed to
translate into $68 of stock- market value. In the dot-com days, you used to see
ratios like that. But not now. Current policy
on dividends is flawed, because corporations pay dividends out of after-tax income, and recipients then pay tax on the
dividends. By contrast, interest
payments are tax-deductible. So
companies have a predisposition to borrow, which often leads to problems. But the way to solve that problem, as
Sen. Jon Corzine (former co-head of Goldman Sachs) says,
is to make dividends
deductible to companies. Not by making dividends tax-free to
recipients. Pardon my skepticism, but cutting taxes on dividends is a Wall
Street perennial. It used to dress up as “fairness.” Now it’s “stimulus.” I think the chances of dividend tax cuts
restoring the economy to full vigor are about the same as a fat man’s sliding
down millions of chimneys and leaving presents behind. The difference is that Christmas is
just one day a year, but eliminating dividend taxes would be forever. Sloan is NEWSWEEK’s Wall Street editor.
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