RFC: dividend tax cut piece
Kendall Grant Clark <kendall@...
2003-01-16 00:10:06 GMT
I got a bit stuck trying to figure out an ending on this piece. I thought
maybe throwing it open to comments will either help me finish it or make
perfectly clear the degree to which no one here is interested in reading
my crap *in draft*! :>
The Bush plan
A large part of the cost of President Bush's proposed economic plan is
the elimination of the dividend tax, an unexpected move which has Bush
admirers calling him "Reaganesque". Most Republicans sent out to
defend Bush's proposal are being very careful not to call it a
"stimulus package", since they know it isn't one: the majority of the
predicted economic impact, such as it is, is expected to occur in
years, not months. One Republican in particular, Sen. Bill Frist, the
new Senate majority leader, is trying to sell the plan by distorting
some very basic economic facts.
Frist made the rounds of Sunday talk shows this weekend, taking his
cues from Bush -- heretofore unknown as an ethicist or moral
philosopher -- who said "double taxation is wrong". Frist based his
defense of Bush's plan in part on what he called a "moral argument".
Frist claims that eliminating the dividend tax is justifiable because
the dividend tax is immoral. It is immoral, Frist adds, because it is
a form of "double taxation".
As Frist explains, dividends are taxed first as corporate profit and
then taxed again when they're paid to investors. Taxing the same money
twice, in Frist's view, is immoral, though he never offers any reason
for that claim. It is, I suppose, one of those unimpeachable American
truths, vaguely evocative of "no taxation without representation".
What is "double taxation"?
Is double taxation immoral? More importantly, what is it? You might
think "double taxation" means paying both federal and state income tax
on the same income. But that's not what the Republicans mean. Or you
might think it refers to some feature of the federal tax code. Imagine
that that code were such that it taxed income from "real estate
holdings" at a 10% rate and also taxed the same income -- under a
different provision of the tax code, say -- an additional 8%. The same
income is taxed twice, for a total effective tax rate of 18%. In that
case, "double taxation" is simply a way of talking about the effective
tax rate. The federal tax code in this scenario may be confusing and
inefficent. But the answer to the question, "is double taxation
immoral" is really the answer to another question, namely, "is the
effective tax rate immoral?" -- a question which I return to below.
However, neither of these glosses are what Frist or the Republicans
mean by "double taxation", which is really just a (very clever and
effective, so far) rhetorical device for justifying cutting taxes on
certain kinds of income. Taking it at face value, which is certainly a
mistake, the biggest problem with the Republican argument is that it
confuses money with income.
Corporations pay tax on corporate income. Sometimes corporations pay
dividends to investors, for whom the payments are income. Bush and the
Republican know, of course, that dividend payments to investors are
income for those investors. In fact, when Bush introduced his propsal,
he claimed that dividend income is a consistent and reliable source of
income for senior citizens (a very odd thing to say on its own).
When I was a very small child, I too was confused about this basic
point. I thought, when I gave my grimy dollar bill to the nice cashier
in exchange for some bubble gum, that somehow the dollar bill was
still mine. For some reason I thought that if I could still see the
dollar bill in the cash register, a real exchange hadn't occurred.
Eventually, by the time I was 5 or so, I realized that when money
changes hands, it's no longer the same money. Later I realized that
when money changes hands, it sometimes becomes income for the person
or organization which receives it. This is a very elementary and
uncontroversial economic fact. Perhaps someone should take Frist and
Bush aside and explain this to them?
But that wouldn't do any good because it's precisely this basic fact,
which no one <em>really</em> disputes, that the Republicans are trying
to mystify. When Frist says "the same money shouldn't be taxed twice",
he wants people to hear him say that a person's <em>income</em>
shouldn't be taxed twice. But that's not what a tax on dividends does,
of course. The Republicans really want people to think that there are
exploited, oppressed taxpayers who pay taxes <em>twice</em> -- or who
pay twice the tax rate everyone else pays -- for having the guts to
invest in the stock market. An absurd suggestion which can only be
made by insinuations and vague associations.
It's obviously not what happens when the government taxes dividends,
which become, as soon as they are paid from Corporation A to Investor
B, income for Investor B and thus subject to income tax of some rate
or other. Imagine a different situation in which Corporation A pays a
bonus to Employee B as a percentage of post-tax corporate profit. By
the Republican's argument, it is equally immoral to tax Employee B's
bonus as income because the "same money" has already been taxed.
Assuming that it's meant as a good faith contribution to political
debate, the Republican argument that "double taxation" is immoral
rests on an elementary factual error. Whatever the morality of the
U.S. tax code, when money changes hands it often goes from being
income for Party A to being income for Party B. Income and money are
not the same thing, no matter how confused Bill Frist and George Bush
are or pretend to be.
But what about the morality of taxation in the first place?
Another shoddy claim the Republicans are relying on these days
is the idea that, since rich people pay most of the income tax
collected by the federal government, you can't cut taxes without
rich people getting most of the benefit. Setting aside the fact
that this claim confuses, deliberately, income and other forms
of taxation (like payroll taxes, which rich people don't pay at
all), do rich people deserve a tax cut as a matter of morality?
The argument for progressive taxation
From the standpoint of morality, paying taxes is a way of contributing
individually to a common or collective enterprise -- i.e., U.S.
society -- from which some measure of benefit is derived. A moral
justification of taxation per se, then, says that since individuals
derive benefit from the actions of the federal government, it is
reasonable to expect individuals to contribute to the costs of its
ongoing operations. But, the put-upon right libertarian objects, I
don't take welfare, I work hard and have earned everything I have. Why
What such people ignore is that wealth and income are thouroughly
social, thoroughly collective enterprises all the way down. There
simply is no such thing as wealth or income, because there is no such
thing as "the capitalist market", without things like private
property, debt, laws, courts, government regulation, government
enforcement of contracts and torts. Markets are not naturally occuring
phenomena; markets are not like emperor penguins, icebergs, and
near-earth asteroids. There simply would be no highly-ramified
ecnonomic system within which a relatively small number of people can
accrue millions, even billions of dollars -- including the ability to
liquidate wealth, move it as capital to other countries, invest it in
foreign markets, and so on -- without the capitalist market. All of
which rests upon the operations of the federal government, which
collects taxes as a way of keeping the whole thing going.
This kind of selective blindness to social benefit is both deeply
racial and political. As the historian David Roediger has argued, in
his excellent collection of essays, <i>Colored White</i>, the public
perception and representation of government benefits are highly
racialized. For example, welfare programs, like AFDC, which are in
fact not at all race-specific, are perceived to be merely racial
handouts benefitting nonwhites disproportionately. And the inverse is
that, for example, federal transportation projects -- highways,
bridges, public transit systems -- which <em>are</em> race-specific,
accruing in large part to the benefit of white-flight suburbanites,
are not perceived to be benefits at all.
The question of how much tax is morally appropriate for any individual
(or corporation) to pay is either a question of how much benefit that
individual derives from U.S. society or, alternately, how able that
individual is to pay. In other words, obligation is either tied
(directly or indirectly) to benefit, or obligation is tied to the
ability to pay (where that means how much income one has after one has
secured the things necessary to living a good life: food, housing,
health care, and so on).
In either case, a progressive taxation scheme, in which the rich pay
more than anyone else, falls out with very little effort. The rich
are, by definition, those who have received the most benefit from the
existence of the state and the market. In which case, it is morally
justifiable that the rich pay more because the rich have received more
benefit from the system. Or the rich are, by definition, those who are
able to pay more; it is morally justifiable that they pay more because
they have more after securing the necessities of a good life.