Posted 9:00 AM by Robert

A Jump In Unemployment Almost Everyone Can Enjoy

The Wall Street Journal reports:

President Bush's proposal to end the double taxation of dividends has been killed off so many times in the media that many investors think it'll never happen. But the real news is that the idea has been gaining support, as politicians and business take time to understand it.

This is excellent news in one respect. "Double taxation" of corporate income is silly, counter-productive and anti-growth: Another study, by the Business Roundtable, shows that the dividend proposal will increase job creation by as many as 500,000 a year over the next five years. (On a side note, the Journal refers to this five year effect as a "short term" benefit - but "short term" within the Beltway clearly means "before the next election." This aspect of the President's tax plan will not create meaningful "short term" benefits under that Beltway definition.)

But in another respect the news is not so good, because the President's program eliminates the wrong tier of such double taxation: the taxes paid by individuals. It's the corporate income tax that should go - not the tax on dividends. Even the liberal-leaning economists who signed the letter opposing the President's tax plan all agreed that the corporate income tax should go instead of the tax on dividends. (Perhaps it was this letter's inclusion of this common sense, obviously appropriate proposal that deterred Brad DeLong from signing it - notwithstanding his hyper-partisan distain for the President.) While that letter did say that its signers would prefer that corporate income tax repeal be included in a revenue neutral reform - the issues of overall tax revenue and tax structure are not identical, and I believe that most of those signers would hold that repeal of the corporate income tax would benefit the economy regardless of the level of overall tax revenue.

Of course, many people have pointed this out and - as the Journal admits - the President's approach is correct given the current political reality that the Tom Daschle's and Nancy Pelosi's of the world would have fallen upon any proposal to eliminate the corporate income tax like hungry political wolves.

But if, as the Journal reports, the substance of the President's approach can be accepted by enough people (especially in Congress), then perhaps it can be given the right form.

The cost differences between eliminating the corporate income tax and the dividend tax would be huge. Because the effect of the President's proposal is located at the wrong (individual taxpayer) tier, it must be - and is - enormously complex. The complexity essentially models as closely as possible at the individual level tax effects that could be achieved by actually eliminating existing complexity (and introducing no new complexity) if the corporate tax were eliminated.

To get some understanding of the dimensions of the cost and complexity differences between eliminating the corporate income tax and eliminating the tax on dividends one might consider that eliminating the corporate income tax would (1) put every corporate tax accountant and tax lawyer in the country out of business, (2) eliminate the entire departments maintained by every major investment bank in the nation for the sole purpose of cranking out tax-advantageous financing structures of the very type Congress is now saying it is shocked, shocked! to find that Enron employed to "manipulate" its earnings, and (3) completely eliminate all incentives on corporate management to spend time stroking their employer's tax position - leaving management lots more time to actually run the company and make money for their investors and a lot fewer opportunities to obscure managment's performance by manipulating tax obligations.

But the President's proposal will greatly increase the complexity of many aspects of the corporate/investor interface. The substantive benefits from the President's proposal are very real - much more than enough to justify the added complexity. But there is absolutely no good reason for accepting such additional complexity and cost when substantive tax effects which are almost the same as those the President is proposing could be achieved by Congress enacting a new statute of one sentence: The corporate income tax is hereby repealed and the Internal Revenue Service is authorized and instructed to publish such rules and procedures reasonably necessary and proper to effect an orderly and efficient termination thereof. And then all those tax accountants and tax lawyers and tax investment bankers could line up at the job board!

Wouldn't it be nice to see the unemployment rate jump just that much?