Politics & Policy

This Isn’t France

The "class-warfare" assault on Bush's tax-cut plan won't work.

President Bush’s critics reacted in predictably uniform fashion to his latest economic proposal: They cried class-warfare.

Good luck making that charge stick. America isn’t France. The politics of hate-and-envy doesn’t resonate here like it does in Europe. We want more freedom and opportunity.

Consider the president’s call to end the double taxation of dividends, which is sure to give the stock market a boost and improve American competitiveness. Under his plan, businesses will still pay tax on corporate income, but individual stockholders no longer would have to pay a second layer of tax on that income when it’s distributed as dividends.

There’s no question that a dividend tax cut would produce growth. Even Marxist economists recognize that investment is the key to long-run growth and rising wages. Yet the tax code punishes investment by taxing the same dollar of corporate income twice. Indeed, it’s possible for the same dollar of income to be taxed up to four times. Discarding one of these extra layers of taxation will encourage businesses to invest more. This will lead to more jobs and higher living standards.

It also will mean higher stock prices. The value of financial assets is determined by how much after-tax income businesses can expect. Removing the second tax on dividends will increase that future income flow and therefore help the stock market. Financial experts say the stock market could expand by about 10% under the Bush plan, boosting national wealth by nearly $1 trillion — welcome news for workers who have watched their IRAs and 401(k) accounts shrink.

But this isn’t just an economic issue. Repealing the double tax on dividends is the right thing to do. It’s high time government stopped imposing penalties — or granting preferences — depending on how people get or spend their income.

The president’s plan promises several other benefits. Under current tax law, for instance, companies are encouraged to use debt, not equity, to finance investments. Why? Because dividends are taxed twice and interest on corporate bonds is taxed only once. If Bush s plan is approved, this bias disappears and companies will have a strong incentive to strengthen their balance sheets. This would mean fewer bankruptcies.

The tax code also creates a perverse incentive for companies to hoard earnings. Why? Because the double tax on the earnings they keep (capital gains) is lower than the double tax on the earnings they distribute (dividends). The president’s plan would end this anti-dividend bias, giving companies an incentive to attract investors by offering dividends instead of promising capital gains.

This would improve corporate governance (fewer Enrons, anyone?) since firms no longer would feel as much pressure to boost share prices by making unwarranted claims about future revenue. Instead, investors would judge a company by the amount of cold, hard cash it pays its shareholders.

Most importantly perhaps, the Bush plan also would boost U.S. competitiveness abroad. According to a Cato Institute survey, only three of the world’s 30 developed nations — America, Switzerland and Ireland — double tax corporate income. And since Switzerland and Ireland have lower corporate tax rates, this means America has the most punitive and anti-growth dividend tax in the industrialized world.

This is an embarrassment — and it clearly puts America in a disadvantageous position. About one-fourth of our competitors don’t impose any double taxation on dividends, while almost all the rest have policies that provide at least partial protection from double taxation. By ending the double taxation of dividends, President Bush hopes to bring America from last place to first in this critical measure of global competition. This means more jobs for American workers and more capital for American companies.

Of course, the president’s opponents began criticizing the proposal before it was even introduced. But their class-warfare arguments don’t make much sense in a global economy. You don’t help the poor by imposing high taxes on the rich. Such policies simply drive money from the U.S. economy and benefit our competitors.

Other critics claim that tax cuts will explode the deficit — a classic cart-before-the-horse argument. As President Kennedy explained more than 40 years ago, the purpose of cutting taxes is not to incur a deficit, but to achieve the more prosperous, expanding economy that can bring a surplus.

President Bush understands that economic growth is the first priority. His plan to eliminate the double tax on dividends is a bold and visionary step. His plan will make our nation stronger and improve the living standards of all Americans.

— Daniel Mitchell is the McKenna Fellow in political economy at The Heritage Foundation.


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