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January 7, 2003

Cut, Cut, Cut

There’s a great scene in an old Laurel & Hardy movie, in which Stan and Ollie are hired as gardeners. Their first task is to trim a hedge and, to save time, they decide to start at opposite ends. Predictably, when they meet in the middle, one has trimmed his side 6 inches lower than the other. So they try again, and this time the other side is lower. The scene ends with Stan running over the former hedge with a lawnmower.

I was reminded of this by Winterspeak’s passionate defence of cutting taxes on dividends. First they cut taxes on capital gains, violating the principle of tax-neutrality. Now, to compensate, they propose cutting taxes on dividends (even lower). You see where this is going …

Except the analogy with Laurel & Hardy isn’t perfect. See, in addition to issuing stock, there’s another way corporations can raise money, namely by borrowing. Taxing interest on corporate bonds at a different rate from the tax on dividends or capital gains is every bit as much of a distortionary violation of tax-neutrality.

You haven’t heard the Bush Administration advocate slashing taxes on interest from corporate bonds…yet. Don’t worry, you will. The analogy with Laurel & Hardy was flawed. Perhaps the Three Stooges would be more apt.

Posted by distler at January 7, 2003 9:54 AM

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We may as well rush to the bottom and declare an end to tax on any business. It’s not worth the accounting hassle and bad business decisions made to avoid tax. In exchange we can mandate a corresponding elimination of any deductions on personal income and a requirement that all businesses disburse all profit (including retained earnings) as income to the shareholders at their normal income tax rates, i.e. no capital gains special rate. Couple that with a confiscatory estate tax for anything over $10,000,000 and you’ll not miss the corporate taxes at all and maybe people can start investing for profits instead of tax shelters.

Posted by: Dave Roberts on January 13, 2003 8:15 PM | Permalink | Reply to this

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