News Column

Dividend Plan Far From Simple

January 10, 2003

Andrew Cassel

'Tis a gift to be simple. And by that standard, President Bush's plan for stock dividends looks like the proverbial lump of coal in the Christmas stocking.

Oh sure, first reports made it sound grand: In one giant step, the President wanted to stop taxing shareholders' dividend income. No partial exclusions or halfway measures, as some of the pre-announcement speculation had claimed. Bush, the bold Texan, was going for the whole enchilada.

But hold the hot sauce.

A closer reading, as they say, reveals that the dividend tax cut isn't quite so clear as all that. Indeed, it's hardly clear at all. In terms of simplicity, it's right up there with things such as Latin noun declensions, molecular physics, or networking your home computers to the cable modem.

Here's a sample:

Under the White House plan, people who receive dividends on their common-stock investments would no longer owe taxes on that income - but only if the companies themselves had paid taxes on it.

If the company had avoided federal taxes on some or all of its earnings - legitimately, of course, as companies do all the time - then any dividends from those earnings would be taxable to the shareholder. That's very clear? Right?

Got that? Say you invest in Consolidated Widget. The company reports a profit of $10 million, and declares it will pay some of that out in shareholder dividends. You receive a check for, say, $100.

But at the same time, using depreciation, investment credits, and similar tax deductions, the company reports only a $1 million profit to the IRS. That's fine for Widget, but it means you owe taxes on nine-tenths of your dividend. In the proposed top income bracket, you would have to send Uncle Sam $31.50 (35 percent of $90).

There's more. Suppose Widget earns $10 million, and does pay taxes on the full amount, but pays no dividend because it wants to reinvest its cash in its own business.

You could still benefit, as a shareholder, because the retained earnings would still raise your "cost basis" - lowering what you'll owe in capital-gains taxes when you ultimately sell your stock.

Sound complicated? Exactly right. If Bush's plan passes Congress in its current form, millions of American shareholders will spend countless extra hours figuring and refiguring their gains and losses, or turn over much of their tax savings to the accountants and lawyers that they'll need to keep track of it all.

"People who do their own returns but don't keep very good, detailed records aren't going to get the benefit" of Bush's tax cut, Thomas Langdon, a tax professor at the American College in Bryn Mawr, predicts. "And those who pay for professional tax help are going to pay a whole lot more."

Boon for tax preparers

Maybe that's what Bush means by calling it a "stimulus" plan. It will certainly stimulate the tax preparers.

This isn't simply a minor whine, a headache for the wealthy few who even care about how dividends are taxed.

When you need a microscope and a fine-tooth comb to see all the glitches and gotchas, it means the tax law is more of a burden than it should be.

Not only does complexity increase the chances for abuse, but all that time and energy spent learning and relearning the ever-changing landscape of tax law is itself a real drag on the economy.

Conservative estimates put the cost to pay taxes at about $75 billion a year, including money and time diverted from productive work.

Of course, there are other things to argue about in Bush's tax plan, such as whether it overly favors the wealthy and what it will do to the national debt down the road.

But if the fight over Bush's 2001 tax cut is any guide, such arguments aren't likely to get very far.

Maybe it's time for the President's opponents to try a new tack.

Because whatever else it is, there's no doubt that Bush's plan adds yet another layer of complexity to a tax code that is already too darn complex for our own good.

Source: Copyright ©2003 Philadelphia Inquirer. All Rights Reserved.

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