Democrats oppose the Bush tax proposal because it favors "rich people," who are assumed to be its predominant beneficiaries. The truth, however, is a bit more complicated. First of all, most holders of publicly traded stock already don't pay tax on dividends. The two biggest shareholder categories are 1) pension funds or other tax-exempt entities (including 401(k) plans and IRAs), and 2) other corporations, which enjoy a 70% corporate dividend exclusion. Only an estimated 30% of publicly traded shares are in the hands of individuals who pay a full dividend tax.
More important, rich people- known in securities law parlance as "accredited investors"-have lots of investment alternatives, including the ability to invest in private pass-through entities and thus to benefit from a single level of taxation on business profits. People with serious money also often own real estate (which enjoys all kinds of tax incentives) and bonds (which, as noted above, are really a form of pass-through taxation).
Middle-class and working-class individuals, meanwhile, also like to save and invest, but these individuals aren't accredited investors and don't have access to private equity deals. They are in effect ONLY allowed to invest in publicly traded stocks, which means their equity investments are ALWAYS going to be subject to double taxation. What class of people is penalized the most by double taxation? You tell me.
Bush's biggest problem is that his tax proposals (which also include eliminating the "marriage penalty," and accelerating some of the 2001 tax cuts) will cost the federal government something like $600 billion to $900 billion in revenues, and the question is whether these revenues should be "spent" fixing tax distortions or on something else.
I personally favor Bush's proposals, especially eliminating the double tax, even though it is probably against my self-interest. (Double taxation creates lots of work for tax lawyers, and so we view it the same way that doctors view motorcycles and dentists view candy.) First of all, I am always in favor of trying to fix the Internal Revenue Code. The Code itself is a mess-a hugely complicated jumble of often incoherent objectives and philosophies. Part of the problem is that we want the Code to do too much: You can make a very credible argument that the core document embodying the American social compact today is not the U.S. Constitution but the Internal Revenue Code.
The Code has become the de facto manifesto of American governance, our preferred device for allocating public resources and costs. The Code encourages all kinds of behavior: having children, saving money for retirement, building low-income housing, using alcohol as fuel, owning your own home. The Code also penalizes behavior, sometimes bizarrely so: It penalizes marriage when both spouses work, penalizes people who rent homes instead of owning them, and most famously, penalizes people who work over those who don't.
Doing all the tasks we assign to the Code fairly and well ought to be a reasonably high priority in this country, and for my money the Bush proposals are generally headed in the right direction. On the other hand, Bush has made a lot of important New Year's resolutions, and fixing the idiocies of the Internal Revenue Code is just one of them.
It is easy to make New Year's resolutions and much harder to make predictions, and so I will not try to handicap Bush's chances of success in pushing his tax proposal through Congress. One thing, however, seems certain: 2003 is shaping up to be a very, very interesting year.
Joseph B Darby III is a shareholder in the Boston office of the international law firm of Greenberg Traurig. He practices in the areas of business law and corporate and individual tax.