Freeing Dividends from Tax January 9, 2003January 22, 2017 WAIT A SECOND! Bob Fyfe: John forgot the :06 seconds – 01/02/03 04:05:06. ☞ And now he’ll have to wait 1000 years to get it right. But Brooks Hilliard offers solace: ’01/02/03 04:05 may be gone,’ he writes, ‘but it won’t be long before 03/03/03 03:03:03. And 03/04/03 04:03:04 should be a lot of fun too – not to mention the rest of the first few weeks of March up through the 23rd.’ MORE PLASMA TV Paul Lerman writes that David and Hans’s advice about waiting to buy a flat screen TV was wise. LCD displays that could cost (and weigh!) just half as much as today’s plasma screen are not too far off. See, for example, this mention of Samsung’s plans. Ivan Maltz: ‘I don’t want you to miss out the quality-of-life improvement offered by Plasma TVs. I bought a 42″ Panasonic from an Internet vendor for $3500. Watching a DVD is more like going to the movies than watching TV. Learn the FAQs before spreading misconceptions about power consumption and product lifespan. Power consumption is moderate – 350 watts. This is offset by turning off all the lights when watching to get that theatre experience. The displays have rated lifespan of 30,000 hours till they lose half their brightness – this is in excess of 10 years of normal viewing. The AVS Forum has a great section on Plasma displays. For starters, check out the FAQ page. Just like TiVo, plasma TVs must be experienced to be appreciated.’ ☞ Well said, though personally I don’t like watching TV in the dark no matter how good the screen. And to me, the even-better picture is nice, but TiVo is truly life-changing. And costs, all in, one-sixth as much. MAKING DIVIDENDS TAX-FREE Say you are an elderly person with half a million shares of Merck. Merck pays a $1.44 dividend, so you get $180,000 a quarter (500,000 times $1.44 divided by four). The taxman currently grabs $70,000, give or take, leaving you with just $110,000 a quarter. President Bush’s new initiative would give you $70,000 extra every 12 weeks to buy all the things you always wanted but could not afford. What better way to help the elderly and stimulate the economy? I’m sold. And even if blowing $30 billion a year on this doesn’t much help the economy (which it won’t) . . . and even if it cuts into state budgets that are already reeling (by making tax-free municipal bonds relatively less attractive, thus raising states’ borrowing costs; and by cutting revenues in states that tie their income tax to federal taxable income) . . . and even if it encourages less investment (by encouraging companies to pay out more of their earnings rather than reinvesting them; and by encouraging investors to favor stodgy income over job-producing growth) . . . and even if it adds to our federal deficit and increases our national debt, weakening our finances and placing a greater burden on our kids . . . I’m still sold. Why? Because the rich in this country have had it too rough for too long, and it’s high time we addressed some of their problems. Sure, we’re forever hearing about people like Amandeep Kaur, a New Yorker profiled in the Wall Street Journal (November 12, 2002) . . . ‘working seven days a week in the newsstand, she earns barely enough to pay for necessities and buy her eye drops’ . . . and about the excruciating pain in her eye. And, yes, we’re sorry for her. (‘Uninsured and Ill, a Woman Is Forced to Ration Her Care,’ the Journal headlined its story.) But what about my friend who owns 2 million shares of International Flavors & Fragrances and must get socked for close to $600,000 a year in federal, state, and city taxes on his dividends. What about his aches and pains? It’s really hard not to get sarcastic about this (and I think my friend with the 2 million shares – a Democrat – would agree). The fact is, there ARE some good things to be said about getting rid of double taxation of dividends. For one thing, it’s a lot harder to fake dividends than earnings, so if dividends ever again came into vogue, it could be an ‘accounting reform’ at least as valuable as anything we have gotten so far. But it is just silly to suggest that this is the best way to jumpstart the economy and get people back to work. And it is the worst kind of bullying to paint dissent as ‘class warfare.’ There IS class warfare being waged, but not in the way that phrase is intended by the Republicans. They came into power after eight years when almost everyone had done well. Yes, the top 1% had done better than everyone else. Even after tax, they were getting richer at a faster pace than everyone else (thank you very much). But it was a time of expanding prosperity and wide opportunity in part because we had found a good balance. All had come to see that the 90% top federal tax bracket of the Eisenhower years was crazy – as was the 70% top bracket of the Kennedy, Johnson, Nixon, Ford and Carter years and the 50% top bracket of the first Reagan term. But many had also come to realize that going all the way down to 28% in the second Reagan term (and 31% once Bush, Sr. inched it up) had overshot the mark. We added $3 trillion to our national debt, interest rates were high, the economy was not so hot. Clinton/Gore set the top rate at 39.6%, significantly expanded the Earned Income Tax Credit to give a break to the working poor, a lot of lives improved, 22 million jobs were created, a lot of red ink turned to black. So into office came George W. with a proposal to cut taxes by $4 trillion in a decade (once the cuts were fully phased in, which he now wants to do much faster and make permanent), with the great bulk of that tax cut going to the top 2% or 3%. He told us we were headed for a recession (always a good way to help precipitate one, if you’re President) and told us that if we eliminated the estate tax on the wealthiest 1% of families in 2010, that would surely help to avert said imminent recession. Oh, give, me, a, break. So please don’t tell me that making dividends tax-free is the most effective way to get the economy moving again, any more than eliminating the estate tax in 2010 (or any other time) is. As to the unfairness of double taxation – take a number! What makes this particular unfairness worth $30 billion a year, ahead of all the others? Or, as faithful reader Hank Gillette e-mailed last night when he saw today’s topic, ‘Mr. Bush has such a finely tuned sense of fairness when it comes to issues that benefit the powerful and wealthy, while being completely oblivious to issues of fairness in other areas.’ ‘To save money,’ noted the New York Times December 23, ‘Kentucky is freeing prison inmates. In California, the governor is threatening to slash financing for the state’s proud university system and cut subsidized syringes for diabetics. Oklahoma plans to scale back health care for children under 6.’ What’s fair about that if you’re under 6? When I was a lad, the first $400 of dividends was tax free. It was so long ago my memory may be playing tricks – maybe it was $200 – but it was something like that. I always assumed there were two reasons for this: one, to simplify tax filing and, two, to give the average gal or guy a little extra incentive to invest in America. Adjust that upwards for inflation to perhaps $2,000 and you would be making dividends tax-free for most Americans. Most Americans today do not have more than $50,000 of dividend-paying stocks outside their already tax-sheltered retirement plans. You’d still see most of the benefit going to the wealthiest Americans, for two reasons. First, unlike most Americans, virtually all of them would get this tax break, because almost all of them own enough stock to use the $2,000 exemption. Second, for them it would be worth $800 or so, because they are taxed at the top bracket, whereas for many, taxed at lower brackets, it would be worth much less. If we did a $2,000 exemption – and I don’t think we should – it would cost the treasury a lot less (saving that hypothetical Merck senior $800 a year in tax instead of $280,000 and my friend with the two million IFF shares $800 instead of $600,000). And when the wealthy did want a tax-free return, they’d continue to buy municipal bonds. (You may be thinking, “These examples are unfair. Almost nobody owns 500,000 MRK or 2,000,000 IFF.” Well, you’re right. Almost nobody does. So why are we proposing to spend the better part of $30 billion a year to help almost nobody?) Surely no one would argue that taxation of dividends starved the stock market of inflows in the 1990s. Or that venture capital, which seeds new enterprises, cares much about dividends one way or another. If tax-free dividends had been Bush’s one great gift to the wealthy in 2001, well, such are the spoils of class warfare, and it could have been worse. But wanting now to make permanent and even to accelerate last year’s gargantuan cut for the top 1%, adding this to it is just ridiculous. Shocking. Depressing. And – because of the massive deficits we’re headed for – irresponsible. Other than that, I like it.