Didi, you have responded like a lady who refuses to be dragged down to mud level. Bravo!!
A wise person learns from the Master, and Warren Buffett has proven that he is one indeed. Here are the views from more Masters: two highly respected Nobel laureates.
commondreams.org
Published on Thursday, May 22, 2003 by the Boston Globe
Dangers of the Dividend Tax Cut
by Franco Modigliani and Robert Solow
CONGRESS HAS just approved tax measures that to a large extent enact the president's request to exempt corporate dividends from the personal income tax. President Bush and supporters justify such a drastic change in our tax system on two grounds: ending the ''sin'' of double taxation of dividends and shoring up a weak economy. On closer examination, however, these turn out to be just excuses. The real intent is a continuation of the old struggle to enrich the wealthy at the expense of ordinary people, including future generations.
This would be accomplished by giving a tax rebate to the well-off of hundreds of billion dollars, and by replacing progressive income taxation with a flat tax. Currently, dividends are subject to two taxes: a flat-rate corporate tax and a progressive personal tax. The proposed reform would abolish the progressive tax and constitute a step toward elimination of the principle of progressive taxation.
Double taxation is widespread in many economies and is not more sinful than any other tax. In the case of dividends it does have some objectionable effects, such as encouraging businesses to use debt rather than equity to finance investment. But this is no reason to interfere so drastically with the principle of taxing according to ability to pay, especially when there are many alternative ways to eliminate double taxation that do not require giving a big windfall to the rich or abandoning the principle of progressive taxation.
The argument that the tax change will stimulate a weak economy also has the air of a lame excuse. An efficient stimulus should have a strong but transitory impact on total spending, terminating automatically when no longer needed. Many such measures have been proposed and discussed. But exempting dividends from income tax fails glaringly on both counts: It would do little or nothing in the short run, and it would last for many years.
Bush has claimed that his proposal would have a favorable effect on investment through higher after-tax profitability. In reality the impact would likely discourage investment. The current tax on dividends amounts to a subsidy for investment financed by retained earnings, reducing the cost of capital. The elimination of the dividend tax would terminate this incentive, discouraging corporate saving and investment.
There is more reason to doubt a favorable long-run effect on investment. Any increases in investment must be matched by the availability of savings to finance them. But savings can be expected to decline appreciably. Government savings will decline by the tax revenue lost, which is the increased income of the share owners.
We should expect these beneficiaries to save a portion of this income and to consume some. But that means that their increased savings is less than the government dis-savings. Corporate savings would fall also. So, national savings would tend to decline - unless households respond to the tax cut by reducing consumption, which seems unlikely. A decrease in investment could be prevented by increasing borrowing from foreigners, which is already at a dangerously high level.
There are other negative implications as well. In particular one can expect a hefty rise in interest rates, brought about by the higher yield of equities and the lower national savings, with adverse effects on government budgets, housing, and elsewhere. And the proposed temporary nature of the detaxation could only breed increased uncertainty and even chaos in the fixed income markets.
It might be argued that all those costs are worth taking for the sake of terminating the double taxation of dividends. However, if the real purpose is to end double taxation, there are more efficient and more equitable ways to achieve that result. Other countries have, in essence, eliminated one of the two taxes, the flat tax, but kept the progressive tax. This could be achieved here through a simple reform, such as requiring shareholders to include in their personal income their share of the before-tax profits of every corporation in which they hold shares, whether received as dividends or not. Any taxpayer receiving dividends smaller than the tax due would have an option to postpone payment till liquidation of the investment. By further retaining the existing corporate income tax on the profit of tax exempt holders, the loss of tax revenue would be small if any.
Let us cling to the hope that Congress will have the courage to spare the country an overall damaging measure.
Franco Modigliani and Robert Solow, both Nobel laureates, are Institute Professors Emeritus at Massachusetts Institute of Technology.
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