Bush Plan Would Wreck an Already Ailing Economy

Wednesday, 07 May 2003 04:07 by: Anonymous

  Bush Plan Would Wreck an Already Ailing Economy
  By Harry K. Schwartz
  The Hill

  Wednesday 07 May 2003

  Even if Americans could afford President Bush s original proposal to make all corporate dividends tax-free, it would be a profoundly bad idea. Congress is right to worry about the cost. But the most far-reaching impacts, and the most troublesome ones, have nothing to do with the federal deficit.

  The federal tax code reaches into virtually every nook and cranny of the national economy. Often what appears to be a simple change can set off ripples in unexpected places. And making dividends tax exempt is not a simple change. Although Congress seems headed off in a different direction at the moment, should the president s plan ultimately be enacted, Americans are in for some nasty surprises. Here are a few of them:

  The Bush proposal has major implications for the financial marketplace, all of them bad. Among companies that sell stock to the public, there will be winners and losers.

  Corporations that traditionally declare bigger dividends will be the winners. Front and center in this group are utilities and real-
estate investment trusts. If you hold stock in these companies, expect it to go up.

  Losers will be companies that do not declare dividends, or declare small ones. That group includes companies that have earnings but reinvest them in creating new technologies, plus smaller, younger companies on the way up that need to retain their earnings to expand.

  If you hold their stock, look for it to go down. And when it goes down, it will be harder for them to raise new capital in the marketplace through stock offerings their traditional source of funds for growth.

  If you were trying to design an anti-stimulus package for a no-growth economy, this would be a good way to go about it. The way big, mature companies improve profits is by shedding jobs. Small businesses and the so-called mid-caps are the job generators and the tech innovators. The Bush proposal favors the former at the expense of the latter.

  Everybody knows about the sorry condition of state and local budgets across the country. What has escaped attention is the extent to which they fund their most basic needs through tax-exempt bonds.

  While the president and lawmakers talk a lot about education, the great bulk of the burden of paying for it falls on local school districts and, to a lesser extent, state governments. When a new school is built, or an old one rehabilitated, look for a tax-exempt bond offering as the essential element in the financing.

  If these school bonds have to compete with newly tax-exempted corporate stock, expect the cost of local school financing (and road financing, and hospital financing) to go up. This would be bad enough if times were good for states and localities. Now, with state and local budgets on the brink, it would be disastrous.

  The president s proposal would degrade or destroy critical public programs that are embedded in the tax code. Although Treasury Department purists would have it otherwise, Congress in its wisdom has long understood that the tax code is there to do more than raise money for the government. It contains numerous incentives in the form of tax credits to leverage private dollars in the public interest.

  Although many of these credits are frivolous and represent pork-barrel tax breaks, others serve vital national purposes. For example, the tax credit for low-income housing is the single most important national program for creating affordable rental housing for the poor.

  And the historic-rehabilitation tax credit is the federal government s only serious incentive for the revitalization of decaying downtowns, neighborhoods and smaller communities. Unless they are exempted from the new tax-free dividend proposal, both of those programs would be disadvantaged, or worse, by the Bush proposal.

  As Congress gets down to serious tax writing this year, members need to focus on more than the budget implications of the corporate dividend proposal.

  They need to think hard about its more far reaching consequences: the turmoil in the stock market as different sectors are repriced, and what that will mean to individual investors portfolios; the new disincentives for investment in high-tech and young companies, and the implications for job growth; the added burdens on states and localities, and the increase in costs for schools and roads; and the potential loss of federal support for affordable housing and historic rehabilitation.

  Perhaps a glance at this sobering picture will reinforce Congress misgivings and persuade it to consign the tax-exempt dividend idea to the wastebasket in which it properly belongs.

  Harry K. Schwartz, a former corporate lawyer, served in the Carter administration.

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