Two stories came out today that are individually interesting, but even more so in combination. The first is a New York Times editorial on the tax plans underlying Bush's plan for an 'Ownership Society':
"When President Bush talks about an "ownership society," hold on to your wallet. The slogan, like "compassionate conservative" before it, is sufficiently vague to mean many things to many people, and the few details that Mr. Bush has provided - encouraging more home ownership and offering new tax-sheltered savings plans - seem innocuous enough. But in tax terms, "ownership society" means only one thing: the further reduction, if not the elimination, of taxes on savings and investments, including taxes on dividends and on capital gains on stocks, bonds and real estate. That, in turn, means, by definition, a shift in the tax burden onto wages and salaries - or, put more simply, a wage tax.The regressive results would be appalling. The richest 1 percent of Americans earn just about one-tenth of total wages and salaries, but almost half of all income from savings and investments - income that would be largely, perhaps entirely, untaxed in an "ownership society." In contrast, taxable wages and salaries make up almost all of the income of most Americans.
Bush has already shifted the tax burden away from dividends and investments and towards wages. He clearly plans to do more of the same in his second term, both by enacting further cuts in dividends and capital gains taxes and by allowing people to set up tax-free accounts for various things, accounts which many ordinary wage-earners cannot set aside enough money to use. The result of this is to favor people who live off accumulated wealth rather than salaries.
Now add this (note: I don't have a subscription to the WSJ, so I am quoting from Phil carter's website, where I found it):
"Ultra-affluent families have long used labyrinthine networks of trusts to protect and build their assets for future generations. The Rockefeller family's roughly 140 living descendants are worth billions, in part because of the seven trusts set up in 1934 with $102 million by John D. Rockefeller Jr., the oil baron's son. The family now uses more than 100 trusts, including numerous charitable trusts, to manage its money.Until recently, though, even the Rockefellers couldn't use dynasty trusts, as they were illegal in most states. Trusts were often subject to the "Rule Against Perpetuities," which effectively limited trust terms to about 90 to 120 years.
But starting in the late 1990s, a number of states moved to relax their trust term limits. Now, at least 18 states and jurisdictions — including Delaware, Wisconsin, New Jersey, Illinois, Virginia and the District of Columbia — allow trusts to last forever. And several states that impose term limits allow much longer durations. Wyoming and Utah, for instance, permit trusts to last 1,000 years, while Florida lets them carry on for 360 years."
Now: as I understand it (and I hope that any lawyers who read this will correct me if I'm wrong), the way things used to work, pre-Bush, was as follows. If I worked hard all my life and accumulated an estate worth, say, a million dollars, I could leave it to my heirs without incurring estate taxes. If, on the other hand, I had a lot of money -- over two million -- my estate would be subject to the estate tax. I might try to avoid the estate tax by setting up a trust fund for my heirs, and putting bits of money into it over time. However, the term of this trust would be limited. This would make it impossible for me to create a trust that would provide income not just for my children and grandchildren, but for my heirs in perpetuity. In either case, my heirs would have to pay taxes on any dividends they received from my estate, and capital gains taxes on any of it that they chose to liquidate. Moreover, my estate could be passed onto them without incurring taxes only if it were below a certain threshold. It is thus impossible for me to set things up in such a way as to provide my heirs with income forever.
If the repeal of the estate tax is made permanent, then I can pass on my fortune tax-free: I can simply leave it to my heirs. And while I can do this now if my estate is below a certain level ($2 million, if memory serves), the repeal of the estate tax would remove that limit, and allow me to pass on my entire estate, tax-free, even if I were Bill Gates. If the ban on perpetual trusts were repealed, however, then I have an additional way to pass on my estate: I can set up a trust which invests my wealth and provides my heirs with its proceeds forever. My heirs would not be able to spend down the principal or remove the money to use it for their own purposes; if I set it up right, therefore, this source of wealth would not be subject to my heirs' future idiocy, but would instead be an unbreakable vehicle whereby my money, suitably invested, could provide my heirs with income until the end of time. In other words, it would allow for the creation of something very like a hereditary aristocracy. If, in addition, the taxes on capital gains and dividend income were repealed, this aristocracy would have perpetual access not just to income, but to tax-free income. The rest of us would have to work and pay taxes; the aristocracy would have to do neither. If the taxes on capital gains and dividend income were dramatically cut but not actually repealed, this would make the aristocracy's income not tax-free, but still very lightly taxed when compared to wages.
As I said, I may be wrong about the law, and if I am, I hope I will be corrected. But if this is right, then it seems to me extremely troubling. It's unfair that people who benefit from government should not have to help pay for it, or should pay significantly less than those who have to work for a living. It's also wrong for any family to be able to secure itself forever against having to earn a living. And it's crazy, I think, to try to create this possibility as a matter of deliberate policy, especially when the country as a whole is deep in debt.
Ahh nuts. I was just about to post on this. Glad I looked first:
Here's another view point (might as well get some of my research out there):
Allan Sloan, in the Washington Post, put it this way:
Need I add, you can't trust this man with money?
Posted by: Edward | September 15, 2004 at 12:25 PM
I'll leave aside the disincentives to work that this massive tax shift will engender, and I'll leave aside the stunning (though common in societies throughout history which have been eventually overthrown, with great loss of life)) result that those who have the most to lose will not pay one cent toward our children's efforts to protect their fortunes against foreign enemies ....
..... and I'll just point out that this is long-term Republican strategy to maintain a majority in perpetuity. When the middle-class learns they will be paying more in taxes than they do today, the Republicans will be there to demagogue those taxes too, and virtually destroy government, which is the objective goal.
You can win any election by demagoguing taxes. Democrats don't need a strategy; we need a virulent, scary tax revolt that threatens government at all levels.
I don't want to pay taxes anymore. Who's gonna make me?
Surely not the same government the Republicans hate.
Posted by: John Thullen | September 15, 2004 at 12:36 PM
I think you are wrong about a number of issues, but I can't tell for sure if they are crucial to your argument.
You seem to be underestimating how trusts and the estate tax interacted. If you had property which could be put in trust and was above the limits of the tax, you typically did so. That is why family businesses typically got sold off under the estate tax, they might have assets above the limits but not enough income to pay the tax without selling the business--they also couldn't easily be put into a trust.
It is also why the repeal of the estate tax didn't cost huge amounts of money to the treasury--most rich people simply avoided it.
When you note that dynasty trusts now exist in some states, I assume you are trying to show how they interact with the Bush plans, not trying to show that Bush made or influenced the changes?
You seem to ignore that investment income tends to invest in things that are taxed. Corporations are taxed by the corporate tax and they pay taxes on their employees. Property is subject to property taxes. This represents a rather large hole in one of your key sentences: "My heirs would not be able to spend down the principal or remove the money to use it for their own purposes; if I set it up right, therefore, this source of wealth would not be subject to my heirs' future idiocy, but would instead be an unbreakable vehicle whereby my money, suitably invested, could provide my heirs with income until the end of time."
Dividend income especially is always taxed at other spots in the corporate structure. The money usually goes through sales taxes, corporate taxes, property taxes and employee taxes before it gets to be paid out as a dividend. So this investment money is definitely being taxed.
BTW I'm against dynasty trusts, but on economic efficiency grounds. I don't trust central governments to decide how to efficiently order things now. I certainly can't trust a long dead investor to predict how to efficiently order the use of property 100 years from now.
As an aside, I haven't been able to confirm it, but I think the Wyoming and Utah 1,000 year trusts are charitable trusts only. (Can anyone confirm that?) I still don't like them for the reasons I state above. The rule against perpetuities is annoyingly complex, but a simple cut-off rule for trusts makes a lot of sense to me. I would think that anything past the 60-100 year range has gone far beyond the useful predictive power of an dead investor.
Posted by: Sebastian Holsclaw | September 15, 2004 at 12:55 PM
Nice post, Hilzoy.
I'd like to tag on a couple of points, mostly in reference to some of the rhetoric that gets tossed around.
First of all, the whole selling the family farm thing is pretty much a crock. I've read several articles that cite people who have never found an instance of this occuring. Example: here, originally from the NYT. Hopefully the source doesn't interfere with things.
Small businesses and family farms are very rarely subject to the estate tax as it stands currently, even less so under the change that will kick into effect in the next few years.
Secondly, the language of double taxation. Can we please stop using this as justification for the removal of tax law? Corporate taxes are practically nonexistent (7.4 percent of total tax revenues last year, the lowest ever.) so the argument that your dividend money is already taxed in the corporate system doesn't seem to hold water.
Which is somewhat beside the point anyways. Dividends paid out to stockholders can be taxed as income for the stockholder without it being considered a double tax because the stockholder's income is only being taxed once! The income of the corporation is taxed, as the corporation is nominally an entity unto itself, and therefore subject to taxation for the benefits and protection it receives from the government. But the dividend is no more double-taxation than is my paycheck, and most of the folks who bandy about the double-tax rhetoric seem okay to have us middle-classers shoulder the burden.
The double taxation language is a run-around. If you don't think that dividends should be taxed, fine. If you don't think that corporations should be taxed, fine, just say so. These issues are clouded enough already.
Posted by: crutan | September 15, 2004 at 01:46 PM
Technically, for it to be an aristocracy, the wealthy class has to also have the political power, and since we elect representatives who are therefore answerable only to their constitu. . . oh, never mind.
We already have an aristocracy.
Posted by: sidereal | September 15, 2004 at 01:49 PM
I was involved in a mediation regarding a family business with forced sale due to the estate tax. I know, anecdotes aren't data. Still I personally know of at least a single case. The NYT cite suggests that no farms have been lost that way. That might make some sense. In California if a family business owned any largish piece of property in a large city, the property value alone is likely to exceed the $2million mark. But often you can't get to that money to pay taxes without selling the property. If your business is run from that property you are screwed.
Posted by: Sebastian Holsclaw | September 15, 2004 at 02:09 PM
Sebastian:
I hate to be mean, but you really do not know what you are talking about re tax policy.
Trusts did not avoid estate tax. They only served to avoid probate, but the tax code had laws governing property essentially "willed" through trusts (i.e., the generation skipping tax for example). The repeal of the estate tax was an enormous give away to concentrated wealth, which was the only group being taxed much by this law.
Under current law, huge amounts can be earned in capital markets tax free, and all of the gain passed on to future generations tax free (stepped up basis). Only the ongoing income from the investment capital is taxed, but never the appreciation in the asset.
It is also common to realize the value of the appreciation tax free by borrowing against it, and then never selling the asset but allowing its basis to be stepped up for the net generation (who can sell it tax free and repay the loan). And the interest payments on the borrowing can then shelter the ongoing income from the asset, which pays the loan.
The post is dead on, and reflects current conservative policy to skew the tax burden onto middle class wage earners. And wreck the government (and eventually the economy) with idiotic fiscal policy.
Posted by: dmbeaster | September 15, 2004 at 02:18 PM
Also:
Sebastion, the alternative proposal to the estate tx repeal was to raise the estate tax exemption to a very high limit (over $5,000,000? -- I cannot remember) but the Repubs voted that Dem proposal down.
Your anecdotal example is irrelevant had the Dem proposal passed. The loss of the family farm or small business has always been phony -- a fruad to conceal the true nature of the repeal of the law.
Posted by: dmbeaster | September 15, 2004 at 02:22 PM
Not a taxation specialist, but sebastian's post is one of the more baffling things i've read in a while.
he said: "That is why family businesses typically got sold off under the estate tax, they might have assets above the limits but not enough income to pay the tax without selling the business--they also couldn't easily be put into a trust."
huh? what business can't be put in a trust? incorporate, then put the shares in the trust. tada! done.
family businesses get sold at death for two reasons: raw stupidity of the principal for failing to do the above; and the desire of the decedents not to run the business.
he said: "It is also why the repeal of the estate tax didn't cost huge amounts of money to the treasury--most rich people simply avoided it." cite, please.
he said: "You seem to ignore that investment income tends to invest in things that are taxed."
actually, you didn't. the only relevant question is whether trust distributions are "income" for purposes of the tax code. If not, then income from capital is tax free, and the tax revenues the federal government used to receive from that source needs to be made up elsewhere, like by taxing labor more.
and that's really what this "ownership" society is about. those of us who make enough money to have savings can put those savings to work in a way which decreases revenues to the feds. since no one is talking about cutting expenses, this means (a) the fed govt goes further into deficit or (b) the feds tax labor more.
the change in the trust law appears, to my untrained eye, to be just a feature of this shift. those who have savings (i.e., wealth) can protect ever-increasing amounts of their wealth AND THE INCOME GENERATED FROM THAT WEALTH from taxation over ever-increasing periods of time.
Sebastian's concern about being governed by a long-dead investor is just a red herring. here's a likely trust instruction: (a) the executor is to maximize trust distributions while minimizing risk to the corpus of the trust. (b) the beneficiaries of the trust get to pick the executor.
now all i need to do is kill off my parents, get the minimum wage law repealed and i can live like a king (literally -- because kings by definition don't pay taxes).
cheers, wage slaves!
Francis
Posted by: fdl | September 15, 2004 at 02:40 PM
Sebastian,
In fact very few, if any, small businesses are sold to pay estate taxes. During the debate on repeal the Republicans scurried around trying to find a family that had suffered this fate and were unsuccessful. In any case, a simple increase of the exemption amount to say, the $5 million level proposed by Democrats as an alternative, would have eliminated this problem entirely. But Bush did not want to eliminate it. He wanted to use it as a club.
Did the tax raise negligible amounts of money? No point jousting about adjectives. It produced just under $30 billion/year. That would buy a lot of health insurance.
You write:
You seem to ignore that investment income tends to invest in things that are taxed. Corporations are taxed by the corporate tax and they pay taxes on their employees. Property is subject to property taxes.
I think you mean that investments are taxed. True of real estate. Though I suspect that in another context you would argue that an increase in the property tax is really a tax on tenants, not landlords, just as the conservative position on employer payroll taxes is that they are really paid by the employee. The business about corporate taxes is a red herring, as crutan points out, and there is zero argument that interest income is double taxed. It is worth noting that debt markets are in fact larger than the equity markets.
In any case, there are lots of double taxes running around. Payroll taxes (employee portion at least) and sales taxes are obvious examples. But these hit lower income people harder than taxes on dividends, so why should Bush worry?
Posted by: Bernard Yomtov | September 15, 2004 at 02:42 PM
David Brin had a great rant on the estate tax before the 2000 elections.
The whole tax thing looks like an attempt to turn the US into Juan Peron's Argentina, or maybe Franco's Spain. Real shining examples of economic success, those two. Wealth and political power concentrated in the hands of the elite.
Oh, and while we're at it, anybody who's worried about estate taxes on a farm, get your arse to a lawyer. Now. There's only a problem if the farm is an unincorporated business. I suspect that any other small business would be in the same situation; I haven't checked the rules.
Posted by: lightning | September 15, 2004 at 02:46 PM
You seem to ignore that investment income tends to invest in things that are taxed. Corporations are taxed by the corporate tax and they pay taxes on their employees. Property is subject to property taxes.
Whether hilzoy ignored it or not, it is completely irrelevant. Her point is that unless the trust is taxed at the point of the dollar entering the trust (which it won't be; dividend income being exempted from taxes) or taxed at the point of delivery from the trust to the heir/recipient (same), the pot never gets any smaller for them. Thus, an aristocracy.
Hilzoy may, of course, correct me if I have misconstrued her point.
Posted by: st | September 15, 2004 at 03:01 PM
Very informative post hilzoy. And excellent discussion in comments.
I'd like to better understand the conservative argument infavour of the "ownership society". Sebastian gave it the old college try, but I take it this isn't his area of expertise.
One argument I've heard is that taxes on capital are disincetives to productive investment. Often, this is coupled with the claim that dividends and capital gains aren't taxed in Europe and Japan. Could someone with a better understanding of finance tell me if this is true or not?
Posted by: WillieStyle | September 15, 2004 at 03:16 PM
"actually, you didn't. the only relevant question is whether trust distributions are "income" for purposes of the tax code. If not, then income from capital is tax free, and the tax revenues the federal government used to receive from that source needs to be made up elsewhere, like by taxing labor more."
But they are income aren't they? In fact the technical term for trust distributions is 'trust income' isn't it? (Not rhetorical questions, I think they are but my trusts and estates experience is both small and well in the past).
Posted by: Sebastian Holsclaw | September 15, 2004 at 03:19 PM
st -- no, I think you nailed it.
I have always been mystified by the double taxation arguments anyways -- as someone earlier pointed out, conservatives never seem bothered by regressive "double taxation" like the sales tax. I always assumed that we have different sorts of taxes in part so that people with different financial profiles would all end up paying something like their fair share, which they wouldn't if there were, e.g., only an income tax (some people live off savings).
But it seems particularly odd used in this context. Is the idea that because my income comes from a corporation which has itself paid taxes, it's double taxation if I am taxed on that income? If I hire someone to build me a deck and he then pays taxes on the money I pay him, does the fact that I already paid income taxes on it somehow mean that it is unfair to ask him to pay taxes on it as well? If so, should each bit of money have its own little check-box saying "this money has been taxed!", so that when the first person is taxed on it, s/he can check it off, thereby making it tax-free for everyone else? Why do I not think this is a good idea?
Posted by: hilzoy | September 15, 2004 at 03:21 PM
Ruben Bolling sums up just how nonsensical the "double-taxation" argument is at heart.
Posted by: Gromit | September 15, 2004 at 03:52 PM
Do We Want an American Aristocracy?
Nope. Next question, please.
Posted by: Slartibartfast | September 15, 2004 at 03:59 PM
Do We Want an American Aristocracy?
Nope. Next question, please.
Who's more likely to prevent the rise of one, Bush or Kerry?
Posted by: Edward | September 15, 2004 at 04:16 PM
Can someone explain to me how taxes on corporations work in the first place? Don't any and all taxes just get passed on to consumers?
Basically, the question all of you have made me consider is this, "Where do taxes really come from?" and "How can you write a tax code that would bring in enough money for the government to function and still be fair to the majority of it's citizens?"
I guess another question could be "What is the purpose of taxes? To pay for essential government responsibilities and/or to use government as a method to redistribute wealth?"
Aren't these questions where your topic ultimately leads?
PS: Feel free to ignore me. I've been lurking around for quite some time and find the converstations interesting because at least both sides can fairly represent their point of view. (Though is it just me or has the board tacked a bit left lately?)
Posted by: Crock Pot | September 15, 2004 at 04:17 PM
(Though is it just me or has the board tacked a bit left lately?)
Our fearless rightwing leader is on a short break...never fear though...he's like the Governator. ;-)
Posted by: Edward | September 15, 2004 at 04:20 PM
As a small business owner who has both benefited and been bitten by double-taxation and who utilizes a trust I will be adding "Proud to be part of the American Aristocracy" to my business card.
Is there a website that someone can point me to that lists the benefits of membership?
Do I get a personal jet? A castle... maybe an upgrade from my condo. Can I now trade in my Saturn for a Rolls?
I would gladly share my knowledge of trusts, but you see membership into the aristocracy cost me a couple of grand. I would feel the need to be reimbursed for that. I had to get some really smart lawyer to help me set it up.
Okay, I admit nothing constuctive to offer in this post, but I would just say the whole tax code needs updating. That is where the problem begins and ends.
Posted by: Blue | September 15, 2004 at 04:21 PM
Who's more likely to prevent the rise of one, Bush or Kerry?
I'd point to the Constitution, but that wasn't one of the choices. Still, Kerry's arguably closer to being aristocracy than Bush is.
Preventing aristocracy? Not even on the agenda. If it ought to be, then preventing communism ought to be as well. I mean, either of those would be a bad thing, no?
Posted by: Slartibartfast | September 15, 2004 at 04:29 PM
Is there a website that someone can point me to that lists the benefits of membership?
Do I get a personal jet? A castle... maybe an upgrade from my condo. Can I now trade in my Saturn for a Rolls?
You get to be the first in line when the revolutionaries start rounding up the aristocracy....if you like, that is. I understand there's currently no waiting list, but don't be the last to sign up. ;-p
Posted by: Edward | September 15, 2004 at 04:29 PM
Still, Kerry's arguably closer to being aristocracy than Bush is.
Yeah, but Kerry's not suggesting we structure the government in a way that benefits him over the rest of us, the way Bush is.
Posted by: Edward | September 15, 2004 at 04:32 PM
How's changing the tax code in any way related to restructuring the government? Is Bush proposing adding another branch to government, and I just haven't heard about it? Are we getting a House of Lords?
Posted by: Slartibartfast | September 15, 2004 at 04:41 PM
Hi Crock Pot -- and thanks for joining in. (We'll only ignore you if you stop asking such interesting questions ;) ) I imagine corporate taxes do eventually get passed on to consumers, just as, in a sense, my taxes get passed on to my employer (since I'd be willing to work for a lot less money if I didn't get paid.) (Well, actually, I'd probably be willing to do my job, which I love, for as small rent-free cupboard and weekly supplies of lentils and coffee, but you get the idea.) Likewise, in a sense my income taxes get passed on to the corporations I buy things from: that portion of my income that goes to the government is money that I might otherwise spend on all sorts of things.
I think this topic does lead to the questions you raise, which in turn lead to even deeper ones, like: what are the essential purposes of government? and what is fairness anyways? If I get ambitious enough, I may try to post on these at some point, but I am wary of getting too philosophy-professor-ish.
Slarti -- in what possible sense is Kerry closer to being an aristocrat than Bush is? Kerry is a member of one of the poorer branches of an old WASPy family whose influence mostly dwindled away a while back. Bush is a member of the most powerful branch of a rich WASPy family whose power is, at the moment, unrivalled by any other such family that I can think of offhand, but which is certainly both richer and more powerful than Kerry's, and has been for quite some time.
Blue -- if you're a member, you know what the benefits are ;) Your kids will thank you.
Posted by: hilzoy | September 15, 2004 at 04:42 PM
Slarti -- in what possible sense is Kerry closer to being an aristocrat than Bush is?
By marriage, of course.
Bush is a member of the most powerful branch of a rich WASPy family whose power is, at the moment, unrivalled by any other such family that I can think of offhand
Hmmm...well, when you throw in the Commander-in-Chief part, I'd have to agree. But if Kerry gets himself elected, you'd have to say the same about him. Just looking at wealth, though, the Bushes are quite a bit further from the top of the Forbes 400 than are the Kerrys.
Posted by: Slartibartfast | September 15, 2004 at 04:45 PM
How's changing the tax code in any way related to restructuring the government? Is Bush proposing adding another branch to government, and I just haven't heard about it? Are we getting a House of Lords?
Come now Slarti, the "Ownership Society" is ultimately geared toward restructuring plenty of governmental agencies and services. Don't tell me you can't see it.
Essentially, what's on the chopping block includes the much of the EPA, Social Security, Medicaid, and Medicare, and plenty of other other so-called entitlement programs that the greedy consider "hand outs."
Ironically, Bush will leave in place the tax-payer-funded systems that help the rich get richer, the loop holes, the subsidies, the no-bid contracts, all the governmental tools supporting what Kristof terms "noblesse entitlement."
Posted by: Edward | September 15, 2004 at 04:57 PM
Essentially, what's on the chopping block includes the much of the EPA, Social Security, Medicaid, and Medicare, and plenty of other other so-called entitlement programs that the greedy consider "hand outs."
What do you consider them?
FTR, I'd be happy to see the government start cutting pork first, then streamlining and fraud-proofing services. That's not going to happen under Kerry, either.
Posted by: Slartibartfast | September 15, 2004 at 05:03 PM
What do you consider them?
Tangible signs of a society's REAL compassion.
Posted by: Edward | September 15, 2004 at 05:14 PM
Remember, Slarti, it's pork only if its not in your district. otherwise it's bacon. (emeril is right; pork fat rules.)
also, al gore did yeoman's work in implementing a lot of good government contracting measures. oddly enuf, cheney's office has been much more reluctant to continue that work (actually, i have no idea whether that comment about cheney is true or not. but gore did work hard on some regulatory cleanup.)
Francis
Posted by: fdl | September 15, 2004 at 05:17 PM
fdl
"huh? what business can't be put in a trust? incorporate, then put the shares in the trust. tada! done."
It is not as easy as you imply. For example, you have a house or business worth $500K and you have $200K in debt related to that entity. One could try to put their asset into the trust, but a bank would flip. If not one could then claim that the business or individual needs to repay the debt but since they don't own the asset anymore they can't give it back. Lawsuits wild be a flyin'. My point is not that it can't be done, but there are alot of issues to consider... "tada! done" doesn't accurately describe the process.
Hilzoy & Gromit,
"I have always been mystified by the double taxation arguments anyways"
Just so you know I am not putting forth a position that I am holding just my experience related to double taxation of divedends and why double taxation can hurt business.
As a business owner when I receive dividends from MY business I would be far more likely to reinvest that money back into MY company than an employee with their wages might be. Especially, since they may have no method of investing in the company that I own. If I am taxed at the corporate level and then again on the dividend then I would have less money that I "might" reinvest in my company.
Also, sometimes MY company needs money. When it does I might be able to go to a bank and get a loan. As someone who has been rejected by many many banks it is unlikely to work out for me. More likely, I will loan MY company the money at low interest rate. If I have been taxed on dividends received from my company I have less money to loan my company that might keep it afloat.
I could go to my employees and say, "Hey, if you guys don't give me a loan on your wages then we are all going out of business." Some might chose to help, but some might not. The point is the more liquid I am the more likely everyone stays employed.
Now an S-corp eliminates the headaches of double-taxation and gives me greater flexibility when moving money in or out of the corporation in times of need.
Keeping the corporation and the owner solvent is just good business for everyone.
"Blue -- if you're a member, you know what the benefits are ;) Your kids will thank you."
I guess my point is I am truly not a member and with help from those here I will not get any closer to becoming a member... unless of course we rewrite the tax code in a way that makes sense for the small business man... which I am all about.
Posted by: Blue | September 15, 2004 at 05:28 PM
Societies don't have compassion, people do.
Well, many people do. More people should.
Posted by: sidereal | September 15, 2004 at 05:33 PM
Blue -- when I mentioned the 'double taxation' argument, I was replying to st, who was replying to Sebastian, who brought it up. I didn't mean to imply that you were making such an argument.
About dividend taxes: I may have misunderstood you, but: if you have a business which you own, you will not receive dividends from it, in the sense of 'dividend' relevant to the dividend tax. Dividend taxes are taxes on the dividends paid by companies to their stockholders. So if I own a share of IBM, I get dividends on it, and those are subject to the dividend tax. Before the dividend tax cut, I think, dividends from stock were just treated as income: if I earn a salary, and also own stock which pays dividends, I add my dividends to my salary (and any other taxable income I might have) and voila, my income. After the dividend tax cut, taxes were lowered on dividends.
Now: unless your company issues stock, you will not be getting any dividends from it. You will therefore be free to either leave your company's profits in the company (subject to corporate taxes), or take it out (subject to income taxes.) Any cuts in the dividend tax will not affect you directly.
They will affect you indirectly, of course, since (a) the money we no longer get from dividend taxes will have to be made up somehow, and (b) changing people's respective tax burdens always has a variety of indirect effects.
The changes Bush proposes are not really designed to help anyone get into the aristocracy. They tend to help people who stand to inherit from estates worth over $2million, or who live on investment income (e.g. stocks) as opposed to either wages or their own businesses, or who need to realize personal capital gains, or whose income is in the top 2%. That is, people who have already made it, not people who are trying to.
Posted by: hilzoy | September 15, 2004 at 06:02 PM
If I am taxed at the corporate level and then again on the dividend then I would have less money that I "might" reinvest in my company.
In the alternitive, rather than paying out dividend and reinvesting you could just not pay a dividend and invest in capital improvements instead. Plus you get a nice tax write-off out of the deal.
Posted by: Fledermaus | September 15, 2004 at 06:41 PM
unless your company issues stock, you will not be getting any dividends from it. You will therefore be free to either leave your company's profits in the company (subject to corporate taxes), or take it out (subject to income taxes.) Any cuts in the dividend tax will not affect you directly.
I think you're a touch confused here. If a business is a corporation it has stock outstanding, by definition. If it's not a corporation (or if it's a Subchapter S or LLC) then it pays no income tax as an entity. Profits are treated as income to the owner(s) on a pro rata basis. Also, of course, if we're talking about a regular corporation then paying dividends or not will have no effect on its tax liability.
I also echo Fledermaus in sayig that there if you want to reinvest profits in the business you shouldn't be paying out dividends and then putting the money back. You should just leave it in to begin with.
One more point, in fairness to the opponents of double taxation. The legitimate argument against it is not that it is inequitable but that it is distortionary. Because interest payments are not double-taxed companies have a tax incentive to finance with debt rather than equity. In addition, companies have an incentive to retain cash, and invest it in less-than optimal ways rather than pay it out, so capital allocation is less efficient than it might otherwise be. But even if this is a problem, by no means certain, then one better solution is to make dividends tax-deductible to the corporation. This benefits all shareholders, including those that are already tax-exempt, and it would be possible to make up the revenue loss by increasing corporate tax rates.
Posted by: Bernard Yomtov | September 15, 2004 at 07:49 PM
Fled,
"just not pay a dividend and invest in capital improvements instead"
You only do that if you know that you are going to need the money.
My point was about flexibility. Sometimes, you need to funnel money back into a company for unexpected reasons... that was the situation I got caught in. As I said above, an S-corp made that task much easier.
Hilzoy,
I didn't think you were applying that to me... I didn't mean for my comment to come across that way. I was just throwing my 2 cents out there.
"Dividend taxes are taxes on the dividends paid by companies to their stockholders. So if I own a share of IBM, I get dividends on it, and those are subject to the dividend tax"
I am a stockholder in my company. So my company pays its corporate taxes on the profit (Which is about to become my dividend) and then when the dividend is paid to the stock holders (me) who would then pay taxes.
Your analysis in the 2nd paragraph sounds accurate to me.
"Now: unless your company issues stock"
That's an assumption that one could make, but its not always accurate. Companies issue stock.
Your 3rd paragraph is okay, but it isn't always convenient to pay yourself the rest of your corporate income, hence eliminating any profit and avoiding the dividend tax.
Which again speaks to the point of trying to make it easier on corp's by eliminating double-taxation. But, still and small corp is going to be an S-corp and make our discussion mute. Although, there are some advantages to maintaining a C-corp... better deductions and statiscally they are audited less.
Without going into any real detail even today all dividends aren't treated the same. There is traditional preferred stock and trust perferred stock which is taxed differently.
I stick to my real point here... the whole darned thing needs to be reworked.
Posted by: Blue | September 15, 2004 at 08:04 PM
Interesting to have this discussion today.
Today is Sept 15... the deadline for filing your 2003 corporate taxes in you requested an extension...
Which I just mailed mine off today. Corp's that file late get audited less.
Posted by: Blue | September 15, 2004 at 08:12 PM
Yeah, you're right, of course. For one thing, I meant not 'company' but something more like 'business, which might be e.g. a convenience store which you own outright, or in partnership with your brother, or alternately it might be Microsoft, or whatever'. Then: unless it incorporates and thus issues stock, there will be no dividends. And finally (Fledermaus' point): the crucial thing is that the business (of whatever sort) can reinvest its money already, without any dividends or payouts to the owner having to come into the picture at all.
I'm probably incompetent to assess what you say about the distorting effects of taxing dividends, but in general this is exactly the sort of argument that I think needs to be made about taxes: that the effects of one or another tax provision produce undesirable results, where of course what counts as desirable is open to debate. It's partly for that reason that the argument I was, well, ridiculing drives me nuts: it's not an argument about what a particular sort or level of taxation will do, but an appeal to something that purports to be a general principle, but that is never applied consistently (e.g., to the sales tax), and that moreover is completely ludicrous once one thinks about it for a moment.
Posted by: hilzoy | September 15, 2004 at 08:15 PM
Sorry -- that last comment was to Bernard. (Typepad took forever posting it.)
Posted by: hilzoy | September 15, 2004 at 08:17 PM
FTR, I'd be happy to see the government start cutting pork first, then streamlining and fraud-proofing services.
I'm all for that. Though at some point I'll actually have to sit down and come up with a working definition of "pork" that I can actually live with.
That's not going to happen under Kerry, either.
Probably not, but I can't see it worsening under Kerry as much as it's liable to worsen under Bush. I and my friends nearly had an infarction much like von's during Bush's acceptance speech when he a) slammed Kerry for suggesting $2 trillion in expenditures, then b) spent about twenty minutes discussing all the ways in which the federal government could shed money like water.
[Estimates on those expenditures, incidentally, are clocking in at $3 trillion without having budgeted for the war in Iraq as well as, potentially, any other military expenditures we may need/attempt to pursue. I'm not sure whether that's with or without the loss of revenue due to the tax cuts, however.]
I mean, I'm a raging lefty liberal Bolshie pinko commie (or something like that) and even I blanched at the thought of that kind of fiscal outlay in the middle of a (pseudo-)war. I can only imagine what more fiscally conservative sorts must have felt...
Posted by: Anarch | September 15, 2004 at 08:47 PM
"I can only imagine what more fiscally conservative sorts must have felt..."
Most likely they felt a severe pain right behind their throbbing temples as they realized NOBODY, from any party, actually represents them anymore.
Posted by: Crock Pot | September 15, 2004 at 10:19 PM
Shack, CrockPot.
In a last-ditch effort to achieve even an appearance of fiscal conservatism, I voted for Ross Perot in 1992. Yes, I admit it.
I'm probably going to regret this tomorrow, when I sober up.
Posted by: Slartibartfast | September 15, 2004 at 10:25 PM
Happy thanksgiving all.
;)
Posted by: matttbastardseesspam | November 24, 2005 at 01:16 PM
"Do We Want an American Aristocracy?"
I'm for effective job interviews, myself. My problem is my lack of conviction that they exist.
Posted by: Gary Farber | November 24, 2005 at 01:24 PM