accounting fraud is out, tax policy fraud is in - 1.5.03
How to fluff the market, part II
There's no doubt about it, the George W. Bush administration is getting nervous about the economy. Prior efforts to stimulate the economy by reducing interest rates managed to prop up auto sales and the real estate market in 2002. However, most folks who could be induced to buy new wheels due to cheap financing have already done so and additional incentives are only likely to cut into manufacturers and retailers profit margins. The real estate market in high income areas is dangerously overheated; a bursting bubble is a definite possibility. In low income areas (like where I live, for example) as we head into the third year of recession nobody has any money anyway, so those for sale signs are mostly just sitting out there in the snow all cold and lonesome.
Obviously, the Bush administration doesn't give a whit about the little town I live in (or any other little town north of the Mason-Dixon line and east of the Mississippi) but they do care about this: the stock market is down A LOT since he took office. A side effect of the low interest policy is that investments of cash (bonds, CDs) are bringing in pathetically small returns. Just a couple of days ago I saw some porky-looking investment advisor guy on the TV comment that 'we didn't know' we were in a recession last January; now we know but things are looking up. If it wasn't so sad, it would be funny. Things are not looking up, they're looking exceedingly bleak and our nation is being led by a person who says he doesn't want class warfare, but is doing everything he can to start one.
Mr. Bush is desperate to 'stimulate' (or you might say 'fluff') the stock market. If the stock market continues to plunge for another year, and it is likely to do just that, his administration will be in deep do-do. Enron type shenanigans are going to prove more difficult for a year or two anyway. So what to do? Here's a crazy idea - we'll make all corporate dividends tax free. What a great idea - you work for your supper, you pay taxes. Sit on your duff and live off your inheritance, that's tax free!
Mr. Bush says it'll encourage corporate responsibility because CEOs will be rewarded for making profits instead of pumping stock prices. This is a dubious proposition in an environment where CEOs make astronomical incomes even while their companies are spiralling into bankruptcy. But it is, nevertheless one with a grain of truth. The stock market game has become excessively oriented toward efforts at predicting stock appreciation and this trend has come at the expense of attention to stock earnings. It's not inappropriate for tax policy to be used to address this issue, but there's a simpler and better cure available. Tax short term capital gains (on securities, at least) at a higher rate, and tax dividends at another rate closer to that of ordinary income (you know, money earned by work). This would discourage speculation on the market and would also generate needed revenue to run the government. It's a much simpler cure but it entails raising taxes, an impossibility to those hide-bound by neo-conservative ideology.
Making corporate dividends tax-free is class war because it raises the percentage of taxes paid by working people and lowers the percentage paid by the leisure class. The fact that many working people get some income from dividends doesn't change this. Exempting the first, say, $5,000 per year of dividends per taxpayer would ameliorate some the negative class inequities of the proposal, but if it's an unlimited deduction it's yet another transfer of funds from working people to the leisure class. It's also illogical economic policy. If investments in corporate stock are tax exempt, why shouldn't investments in bonds be tax exempt? What about investments in real estate? This artificial preference for one type of investment device will distort the economy, causing harm. Ask any independent minded economist, they'll tell you. It's simple, the administration is desperate to fluff up stock prices and hasn't a clue about how to do it without offending their cadre of neo-conservative supporters.
In an administration of bad ideas, bad communication and bad policies, this is one of the worst proposals yet. Here's a hint: if you want to boost the stock market, try staying out of wars, or threatened wars, for a few months in a row. That might help.
