Purpose one: writing a travelogue to describe my various trips.

Purpose two: muse.

Sunday, October 16, 2011

He Could Not Even Cut Taxes Right

When Elizabeth Warren's video went viral, it produced some furore.  It surprised me a little, partly because it did not sound like she said much we have not heard before, and partly because I mostly agree with the first part of her speech.  I was strongly against the Iraq war and the Medicare Prescription Drug benefit that Bush pushed through.  I was initially on the fence about Afghanistan, but do think the US should have left long ago.  I also was not a big fan of the tax cuts, and in response to the debate following her video and some recent comments from friends, I started thinking about why.

I think taxes should be low, simple and even.  The Bush cuts realized the first of these with lower rates, but at the expense of the other two.  In particular, by lowering the rates so much for dividends, we now have a skewed tax system where investors pay a lot less than wage earners. 

There is a fairness issue here, but I want to focus on the economics of this.  Many free-market economists are against the mortgage-deduction (as am I), because there is nothing that tells us, a priori, that home ownership is better than renting.  By giving a big tax break to home owners, the ownership part of the equation gets a lot heavier, instead of letting people decide on more natural factors. 

The same is true of the Bush cuts.  By taxing dividends at lower rates, the government is moving the incentives around to favor investors -- but there is nothing that tells us income earned through dividends is somehow better than income earned through wages.  From an economics perspective, I cannot see how this makes sense.  We should not assume one is better than the other, and therefore, we should tax the two at the same rate.  (Which rate that should be is a different discussion).

As an added defect, the sunset provision is bizarre.  It was almost as if he tried to saddle his successor with a political hot potato, as he must have known it would not go quietly.  Sunset provisions on almost any other Bush-era initiatives would have made more sense: Sarbanes-Oxley, the wars, the Patriot act (actually part of the Patriot act does expire, and some portion got renewed quietly by congress). 

I have not even gotten into the whole issue of cutting taxes while increasing spending.  It's dreadful when they cannot even cut taxes in a way that benefit the economy -- or us, which is the same thing.


  1. There are two types of dividends:
    • A "qualified" dividend is distributed from corporate earnings after-tax, and it is taxed a further 15% to the taxpayer who receives it.
    • An "unqualified" dividend is income which has not been taxed, such as distributions of bond interest from a bond fund. Those dividends are taxed as income at the full rate.


    The marginal tax rate on corporate income between $335,000 and $10,000,000 is 34%, which is bumped to 49% by the 15% personal tax on qualified dividends.

    It is hard to see how the government could take more without destroying the utility of corporations as a way to organize production and still be a reasonable investment that pays dividends.

  2. Correction. Taxes of 34% and 15% applied in sequence have the effect of a single 43.9% tax.

  3. Andrew, thanks for the explanation of the differenece between qualified and unqualified dividends. I do think there is a double taxation problem. The solution to that, IMO, is elimination of the corporate income tax.