I sent this reply to a student who asked questions (see below)
about my comment in class this morning about the Bush proposed
tax cuts. If I have got it wrong and anybody wants to provide
alternatives, please do so.
Paul
------- Forwarded message follows -------
From: "Paul Phillips" <[EMAIL PROTECTED]>
Date sent: Wed, 8 Jan 2003 14:27:15 -0600
Subject: Re: Bush Tax Cuts
Adam
I haven't read the detail on the proposed Bush tax cuts which go
beyond just the elimination of taxes on dividends so I can't
comment on the rest of his package. However, on that specific
point, the issue is this. 98 (+or- a couple of percent)% of all
corporate investment is financed from retained earnings, not from
sale of stock. Therefore, if firms increase their dividend payouts to
attract buyers of their shares (i.e. to bid up share prices) then they
will have less undistributed profits to invest in new capacity. If that
is the case, then firms will be induced to reduce investment.
Similarly, if lenders shift from buying municipal bonds to buying
dividend-paying shares thereby increasing the cost of municipal
borrowing, then municipalities will either reduce infrastructure
investment or increase local taxes to compensate which will have a
negative effect.
As to the effect on the distribution of this tax break I have at
home for the US but it is highly skewed to the top income group.
In Canada where wealth is a little less skewed than in the US the
figures are (1996)
Per cent of population with incomes greater than $150,000 per year
= 1.0%
Per cent of dividends going to those with incomes > $150,000 =
40.4 %.
So, in Canada, the top 1% of the income earners would get 40% of
the tax cut. Extrapolating that down to say the top 10% of the
population, I would guess that the top 10% would get something
like 60-70% or more of the tax cut. The low income don't own
shares (the bottom 20% in Canada and the US have negative
wealth -- i.e. owe more in debts than they have in assets of any
type) and hence will get none of the tax cut. Many of the middle
income will hold their assets in the form of RRSPs or their
equivalent in the US (forget what they are called) and hence now do
not pay anything in taxes on dividends which go back into the
RRSP. Taxes will be paid on these dividends when they are paid
out in income as pensions and will continue to do so, as I
understand it, even after the Bush tax cuts. So, at least with
regards to the dividend tax cuts, Bush's claim would seem invalid.
I will try to check this out with some of my American colleagues
and report back to you.
Paul Phillips
On 8 Jan 03, at 13:21, [EMAIL PROTECTED] wrote:
> Mr. Phillips,
>
> I'm discussing the Bush economic plan with a fellow at work, but I can't quite
> remember, in full, your point on the erosion of retained earnings as a result
> of increased dividends paid to shareholders. Additionally, I'm not quite clear
> on the effects of Bush's plan on income distribution. He claims that this plan
> will put an extra $1100 USD a year into the pockets of the "average" American
> family, while promising tax cuts for 92 million Americans. What does he mean
> by this? Who will be receiving tax cuts, how may they affect aggregate demand
> and employment? Will the increased child tax credit and job search grant have
> any effect on consumption?
>
> Any input would be greatly appreciated.
>
> Thanks,
>
> Adam Hendrickson
>
> -------------------------------------------------
> This mail sent through IMP: http://horde.org/imp/
------- End of forwarded message -------
