Politics & Policy

Adviser Alert

Dividend tax relief will suffer with Glenn Hubbard's exit.

Last week’s announcement that Council of Economic Advisers Chairman R. Glenn Hubbard will shortly leave his post is bad news. I am now far less optimistic that a good tax bill will be enacted into law this year. However, his rumored replacement, economist N. Gregory Mankiw of Harvard, will do a good job of filling Hubbard’s shoes.

The importance of Hubbard to this administration is written all over its plan to eliminate the double taxation of corporate profits. President Bush could have come forward with an infinite number of tax initiatives, some of which might have been easier to sell as “stimulus.” But he chose to redress the overtaxation of corporate profits, an issue Hubbard has been pressing for at least 10 years.

As I noted in an earlier column, Hubbard was the force behind a report issued by the Treasury Department in the first Bush administration in 1992 that argued strongly for eliminating corporate double taxation. While a professor at Columbia University, he wrote numerous academic papers building on the Treasury report. It is fair to say that Hubbard is probably the leading expert on corporate taxation in the United States among economists.

It is hard to see where else in the administration the initiative for eliminating double taxation would come from. To my knowledge, President Bush never talked about it during the 2000 campaign. And he didn’t lack for other tax ideas. His economic summit in Waco, Texas, in August produced any number of good ones. So it is reasonable to assume that Hubbard must have been the one who made corporate tax reform the White House priority.

Of course, eliminating the double taxation of corporate profits is not a new idea. Economists have been complaining about it for decades. And politicians from both parties have vowed to do something about it. Just recently, for example, John Kerry, Massachusetts Democrat and Democratic presidential candidate, had this to say: “We should encourage the measurement of the real value of companies by ending the double taxation of dividends.”

But for all these years, eliminating double taxation was like the weather — everyone talked about it, but no one ever did anything about it. George W. Bush, our only president to have an M.B.A., is the first president to finally put forward a serious initiative to actually fix the problem.

President Bush deserves great credit for making elimination of double taxation a priority. The political obstacles that caused previous presidents to shrink away from the effort are still very formidable. Perhaps the biggest, ironically, is the corporate community. Corporate executives don’t like paying out dividends; they would rather use shareholders’ money for their own purposes and double taxation gives them an excuse not to pay them.

Corporate lobbyists would also much rather have “targeted” tax cuts that help only their businesses or industries than those that help all businesses. So it was not surprising to see this headline in the January 17 Wall Street Journal: “Business Fears Dividend Plan Could Hurt Other Tax Breaks.” I believe that if the dividend-relief plan ultimately fails in Congress, it will be because the business community torpedoed it.

The press often treats presidential initiatives as if they are a “done deal” the day they are announced. But in fact, getting a president to publicly endorse a proposal is just the beginning of a long slow process. The Founding Fathers wanted legislation to be difficult to enact and they succeeded. If Congress does vote for a bill embodying President Bush’s dividend proposal, it will undoubtedly be in a very different form.

Maintaining control over the legislative process is one of the most difficult things for any president to do. It is here where Hubbard’s absence will be felt the most. Without him around to explain why this amendment is acceptable and that one is not, it is too easy for the dividend proposal to be perverted into something worse than doing nothing. Unfortunately, presidents often sign such bills under pressure from their political advisers to appear successful.

The same could easily happen again unless there is someone in the White House with a clear vision of what is trying to be accomplished, who will also have the courage to tell the president he must walk away from his own initiative and fight again another day. Glenn Hubbard is the only one I can see who would be willing to do that and have the stature to get President Bush’s attention.

I have no doubt that Greg Mankiw will fight the good fight. But he is new to the White House and new to politics. He will be much easier to “roll” when the time comes to cut a deal than Hubbard would have been. This makes me think that the odds of a good tax bill being signed into law this year have just fallen dramatically.


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