Now that President Bush has announced a plan to eliminate the double taxation of corporate profits, people are coming out of the woodwork to take credit for the idea. However, there is little doubt that the driving force was Council of Economic Advisers Chairman R. Glenn Hubbard.
For years, Treasury secretaries have talked about getting rid of double taxation. It is wrong in principle, raises the cost of capital, lowers economic growth, and leads to excessive debt and various other problems. The late Bill Simon gave many speeches on the subject, but never actually proposed abolishing double taxation, figuring that it was easier to reform the whole tax system than tackle this one problem in isolation. Jimmy Carter’s Treasury secretary, Michael Blumenthal, also supported elimination of double taxation, as did President Carter, but also never put forward a formal proposal to do so.
The first Treasury secretary to make a serious effort at eliminating double taxation was Nicholas Brady, who served under the elder President Bush. In January 1992, the Treasury Department issued a report entitled, “Integration of the Individual and Corporate Tax Systems: Taxing Business Income Once.” (This 268-page study is available on the Treasury Department’s website.
The author of that report was Hubbard, then serving as deputy assistant secretary for tax analysis at Treasury. It is the most thorough analysis of the problems associated with double taxation and why it should be eliminated.
Unfortunately, the 1992 Treasury effort fell on deaf ears. But Hubbard kept it alive in his academic work at Columbia University, where he returned at the end of the first Bush administration. His most important contribution is an article entitled, “The Share Price Effects of Dividend Taxes and Tax Imputation Credits,” which appeared in the March 2001 issue of the prestigious Journal of Public Economics. (The curious can find it online for a small fee.)
The importance of this article is that it refutes a commonly held view in finance textbooks that double taxation has no effect on share prices. However, Hubbard proved that taxes on dividends are in fact capitalized in stock prices. Thus it is reasonable to assume that if dividend taxes are removed, as President Bush has proposed, share prices will rise significantly. Economist John Rutledge estimates that removal of dividend taxes will raise the S&P 900 stocks by 8.5% or $800 billion.
If this happens, it will go a long way toward restoring investor confidence, which could finally get business investment back on an upswing. Although there is much talk on Capitol Hill that consumers need another dose of rebates, the truth is that consumer spending has lagged little during the economic downturn. The falloff in business investment explains almost the entire decline in growth.
It is clear that Hubbard is the rising star on Bush’s economic team. Although an adviser to George W. Bush during the 2000 campaign, it has taken some time for him to establish himself as the economic adviser Bush now relies upon. Until recently, he had to compete with Treasury Secretary Paul O’Neill and National Economic Council Director Lawrence Lindsey. But now they are gone, while Bush has retained Hubbard.
A key to Hubbard’s growing influence is a keen understanding of the bureaucratic process — something he may have learned in academia, where, as someone once said, the infighting is vicious because the stakes are so low. This has led him to cultivate allies among people like White House Deputy Chief of Staff Josh Bolton and place allies in key positions. The latter would include Richard Clarida, assistant secretary of the Treasury for economic policy, and reported incoming Congressional Budget Office Director Douglas Holtz-Eakin, who now serves as chief economist at the CEA.
There are persistent rumors around Washington that Hubbard may be in for a promotion. The current deputy secretary of the Treasury, Ken Dam, has announced his intention to leave that post as soon as John Snow is confirmed as secretary. Hubbard then may be named to replace Dam, which would put him in a powerful position to press for passage of Bush’s tax plan.
I hope the rumor is true. Indeed, one testament to Hubbard’s value to President Bush is that he has lately come in for attack by partisan Democrats. For example, former Clinton economist Brad DeLong recently posted an utterly dishonest attack on Hubbard on his website, which was quickly picked up by the left-wing echo chamber at the New Republic, American Prospect, and elsewhere. Such people don’t bother attacking those they do not fear.