PRESIDENT BUSH is about to take a good tax-cut idea, mangle it and implement it two years too late.
The White House is leaning toward reducing or eliminating the tax that individuals pay on stock dividends, The Wall Street Journal reported last week.
The goal is to juice the stock market, give more government money back to citizens and correct wrongheaded, distorting taxation of dividends.
If people don't have to pay income tax on dividends, the administration's thinking goes, they'll invest in the stock market, raise the Dow and restore economic confidence.
It might work. But it isn't the best approach to dividend tax relief, and, given what else is going on, this isn't the best time, either.
As envisioned, Bush's dividend tax cut would cost about $25 billion a year. But after three decades of leveraged finance, our federal government owes $5.9 trillion to its creditors, and last year it racked up another deficit, $159 billion this time.
The country can't afford more tax cuts right now. There are large, legitimate fiscal needs, for one thing. And Bush is counting on a strong dollar and low interest rates to nurse the nation into recovery, both of which would be undermined by ballooning federal deficits.
Here's why. At some point the world's capitalists will get fed up with America's ever-rising government, corporate and consumer debt, sell dollars and drive down the value of the greenback. At the same time, if the U.S. government floods the debt markets with billions in new Treasury issues, the demand for borrowed money will rise and so will its price - otherwise known as interest rates.
Low interest rates are the key to economic recovery, not lower taxes. By pushing the country deeper into hock, Bush makes Alan Greenspan's job harder and risks shooting himself in the kneecap.
And a tax cut on stock dividends could put even more upward pressure on rates if it prompts investors to sell bonds to raise cash to buy stocks. (Interest rates and bond prices move in the opposite direction.) Is that what Bush wants?
Cutting taxes on dividends is a fine concept generally, long sought by Republicans and business but also once endorsed by no less a liberal than Robert B. Reich before he became President Clinton's labor secretary.
The problem is that many dividends are essentially taxed twice - once at the company level, as corporate profits, and again at the shareholder level, as individual income.
This disincentive has caused many firms to cut their dividends and load up on debt. Their reasoning: Interest payments on debt are deductible on corporate income-tax returns, while dividend payments on stock equity are not.
The preferred way for shareholders to reap corporate profits in the 1990s was through capital gains, which are mostly taxed at 20 percent, rather than dividends, which, with other personal income, are taxed as high as 39 percent.
The tax discrimination against dividends was blamed by many for the leveraged buyout craze of the 1980s. It would have been much less attractive for corporations to load up on expensive, crippling junk bonds, people such as Reich argued, if dividends were just as deductible against corporate income as interest.
In a perfect world, Reich's proposal would have won the day.
The corporate tax code would have become symmetrical and simpler. Dividends would have been taxed just once, and corporations would have boosted dividend payments. Shareholders might have behaved less like gamblers and more like company proprietors of old, pocketing a portion of annual profits and building for the long term.
Corporations would have had less incentive to hoard cash and invest it in stupid stock-buyback and merger schemes.
But making dividends deductible for corporations didn't happen, and it doesn't look like it will happen. The White House is focused on cutting dividend taxes at the individual level, not the corporate.
Figures. By copying this German model, Bush can claim he's helping people, not corporations, even though companies are basically pass-through mechanisms for shareholders.
The White House plan may deliver some of the same benefits as the Reich idea, but it would also make filling out an individual tax form more complicated, which we don't need. It would discourage people from holding stocks in tax-sheltered retirement accounts; if dividends are tax-free anyway, why have dividend-paying shares in your IRA?
And it would disproportionately reward the rich. People in the 39 percent tax bracket would have the most to gain.
Better if Bush had allowed companies to reap dividend tax cuts. Even better if he had done it early in his term, before stocks crashed and before his other tax cuts helped cause the deficit.