P.L.A. - A Journal of Politics, Law and Autism

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Saturday, December 07, 2002
 
Double Taxation

Treasury Secretary Paul O’Neill and economic advisor Larry Lindsey have been shown the door by the Bush administration. Among the possible replacements for the Treasury position is Charles Schwab, head of the investment firm that bears his name.

Mr. Schwab attended Mr. Bush’s economic “summit” in Waco, Texas last summer. Among his proposals at that time was to eliminate the “double taxation” of corporate dividends.

When a corporation makes a profit, it pays income taxes on the earnings. If the corporation then pays dividends from those profits to shareholders, the shareholder pays income taxes on the amount of the dividend. Some argue that that is “double taxation” and that either the corporate income tax or the income tax paid by the shareholder on the dividend should be eliminated.

Two arguments are routinely advanced in favor of eliminating the “double taxation” of dividends. The first argument is that such a provision would boost the stock market by making the after tax return to investors more attractive, thereby luring more investment into dividend paying stocks. The corollary of making investments in stocks more attractive is that investments in bonds become relatively less attractive. With bonds less attractive as investments, borrowers would have to pay a higher interest rate to attract investors. Thus, the elimination of the tax on dividends would tend to raise interest rates. That is a little discussed effect of the proposal.

The second argument for the elimination of the tax on dividends is an equity argument. It is unfair, it is said, for corporate earnings to be taxed twice, once when the corporation earns the money and once when it pays that money to its shareholders in the form of dividends. That argument is flawed in the inception.

When a wage earner receives a paycheck, he or she pays income taxes. If that wage earners then spends some of the after tax dollars on a service, say to pay a plumber to fix a leaky pipe, the plumber also pays income tax on the same money. No one calls that “double taxation” as the wage earner and the plumber are different people. Each pays income taxes on the amount of income he or she receives.

The equity argument in favor of elimination of the tax on dividends is based on the unstated premise that the shareholder and the corporation are the same entity. That argument has some superficial appeal as the shareholder is the owner of the business that earned the money.

When corporations lose money, however, the shareholder is not treated as being the same as the corporation. When WorldCom went under and left billions of dollars in debt, no one asked its shareholders to kick in their personal assets to pay the debts of the corporation. When it comes to liabilities, the corporation and the shareholder are not treated as being the same entity.

Someone once said that the purpose of a corporation is to allow a gentleman to decide which of his debts he intends to pay. People chose to conduct business in the form of a corporation in order to limit their personal liability for the debts incurred by the business entity. In other words, people chose the corporate form for their business precisely because they will not be treated as the same entity as the business in the event of liabilities.

No one forces business to be conducted in corporate form. The business could be organized as a partnership with each partner responsible for the debts of the whole. In a partnership, taxes on the earnings of the business are paid only once.

When people choose to conduct business in the form of a corporation, they are choosing to form an entity that stands or falls on its own credit. If investors wish to have the profits of their business taxed only once, they need to accept the potential personal liabilities of such a choice.

There may be good and valid reasons to eliminate the tax on dividends but the fact that dividends are subject to “double taxation” is not one of them.



Tuesday, December 03, 2002
 
A Wholly Owned Subsidiary

We noted several interesting items today regarding the methods by which the right wing media act as wholly owned subsidiaries of the Republican Party. Please do not miss today’s Daily Howler. Bob Somerby documents the way in which the RNC and its cohorts in the press spun a perfectly accurate remark by Al Gore into the legendary myth that Gore claimed to have invented the internet.

Lean Left reports on the wholly owned subsidiary's efforts to “gore” John Kerry. Mickey Kaus is deeply troubled by Mr. Kerry’s “furrowed brow.” For the right wing media machine, such is the makings of deeply troubling personal characteristics that show complete unworthiness of any Democratic Presidential hopeful.

Regardless of which candidate the Democrats ultimately nominate, the likes of Kaus, the Wall Street Journal, Fox News, the Washington Times, and Rush Limbaugh will make sure that some superficial trivia such as a hair cut, a facial expression or the nominee’s clothes reveal some deeply troubling character flaw.

The Democrats need to understand that that is how the game is going to be played. The candidate who is able to expose the game and make both the Republicans and their media concubines look as vacuous and foolish as they are is the candidate who can win.

Update: Josh Marshall also discusses the foolishness that is Drudge and the punditry malpractice of the good Doctor Krauthammer.


Monday, December 02, 2002
 
A Concrete Example

We have not gone on hiatus. We have returned from Thanksgiving vacation and are working on some things we hope to post soon. Meanwhile, if you would like to see one small, specific example of how right wing media sources such the Wall Street Journal's editorial page adopt Republican spin without evidence or apology, please mosey over to see today's entry at Wampum.