PALO ALTO, Calif. (CNN/Money) -
President Bush wants to send investors -- most, by definition, rich ones -- an awfully nice New Year's greeting: An elimination of all taxes paid on the dividends they earn.
It's a bad idea, one that's most likely an opening gambit in the negotiations the administration will begin Tuesday with congressional Democrats.
Until very recently, the assumptions about how the president would go about cutting dividend taxes leaned toward modest changes. One way would have been to lower taxes on dividend payments from income tax rates that run as high as 38.6 percent range to the capital-gains tax rate of 20 percent. Another would have been to declare the first certain amount of dividends earned -- say, $3,000 -- to be tax-exempt.
Either proposal would have thrown a bone to investors, but only a bone. Instead, the president is expected to toss in the entire carcass by simply slashing all taxes on dividends.
Too much of a good thing?
It's often said that about half of all Americans own stocks, and so this proposal could be seen as a broad-based tax cut that would be embraced by a wide swath of voters, er, investors.
However, according to IRS data, only 26 percent of Americans listed dividend income on their tax returns in 2000 (the most recent tax year for which the IRS breaks out the numbers in this way).
Folks who hold dividend-paying stocks in mutual funds that are part of their 401(k) retirement plans don't pay taxes on those dividends. So you can see how this tax cut is focused more narrowly on those who hold stocks in individual, taxable accounts.
There's a question worth asking here: Why should income earned from speculating on stocks be taxed any differently that other income? What makes playing the stock market more worthy of a helping hand from Washington than, say, selling shoes or doing construction work or putting out fires?
Recently by Adam Lashinsky
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Nothing, really. And that's why this proposal is good for rich folks. If the proposal passes I'll certainly look at my own investments and see if I'm maximizing my tax strategies. And I won't argue about the tax break. Who knows, I might even vote my pocketbook. I can afford to.
The question, though, isn't what I'd do. It's what is the best policy. Income should be taxed as income, and income taxes generally should be progressive, that is, that those who have the most should contribute a little more.
Not merely because it's the right thing to do. But also because if you want to kick-start an economy, better to put money in the hands of people who will spend it, and not just the top wage earners.
Now you understand why President Bush doesn't want this debate to be about class issues. Because he's making it one.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.
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