"Dividends": The word was barely heard during the go-go '90s, when "growth stocks" that paid off in stock value appreciation rather than dividends were the rage. Dividends are still a verboten concept among the pillars of the high-tech economy, where executives sit on vast cash hoards in the billions of dollars rather than pass on any of their profits to their shareholders. Their attitude is, basically, "We don't need no stinking dividends!"
When you buy a stock, you are theoretically buying a slice of the future earnings of a company, which will be paid to you in dividends over time. In practice, dividends have become associated with unsexy companies once tarred with the label "old economy" that actually had some profits to distribute.
As one Wall Street Journal Op-Ed put it recently, "Scan the list of companies worth over $10 billion that pay a high dividend and you don't exactly come away with the future of America, more like old home week ... Dividends entice investors into debt-laden, slow- or no-growth companies, more likely to cut their dividend, burning investors worse than conflicted research analysts. Run away. They are wearing a scarlet dollar sign. You want yield? Buy a bond."
So why is President Bush's new tax package so heavily focused on the dowdy dividend? According to the leaked details, Bush will propose on Tuesday, as the centerpiece of his new economic policy, an end to the tax on dividends -- which are currently treated as regular income for federal tax purposes.
Now, there isn't exactly a mass movement to repeal the dividend tax. You don't see too many street demonstrations or write-in campaigns in which an impassioned citizenry vents anger at its injustice. And you can bet that when Bush gets up before the American people Tuesday to unveil his plan, he will dwell compassionately and lovingly on other, more crowd-pleasing aspects of his package -- such as an increase in the child tax credit, an acceleration of the tax-bracket tinkering that was the centerpiece of his last tax package, or some other proposals with middle-class appeal.
But the numbers tell the real story here: Those proposals will add up to relatively modest dollar expenditures, while ending the tax on dividends will cost the government $300 billion over 10 years. That's a full half of the entire $600 billion tax cut going to this one measure.
And yes, this plan is every bit as weighted in favor of the stock-holding wealthy as Bush's critics are already claiming. In fact, it's even worse than it looks. In theory, stock ownership spread to a much wider swath of the U.S. population in the 1990s, when we all supposedly tuned in to CNBC and got bitten by dreams of day-trading riches. So, a tax break on dividends should benefit a lot more people than ever before -- in theory. Only there's a catch: By far the great bulk of stock ownership among the less-than-wealthy is held in retirement accounts like 401Ks or IRAs, which are already not being taxed. So the dividend change makes no difference at all to them.
Republicans are already trying to tar Democratic complaints about this imbalance as "class warfare," and they're half right: It is class warfare, only Bush fired the first shot, and he fired it on behalf of that tiny sliver of the American populace who stand to benefit from his proposal.
There's a reasonable argument to be made that the tax on dividends is a tax-policy mistake that distorts the financial markets: Companies pay taxes on their profits and then stockholders pay tax on the same money again when they receive it as dividends, so it's a kind of double taxation. Corporations end up with an incentive to take their extra cash and buy back their stock rather than distribute dividends.
But really, so what? "Tax" and "fair" rarely go together. The tax code is full of distortions, irrationalities and unfairnesses. (One example: A tax-code tarball called the Alternative Minimum Tax is going to start walloping everyday Americans over the next decade unless Congress does something.) Tax policy is about picking and choosing which of those wrinkles one wants to iron out, and at what cost, and toward what end.
In plunking down $300 billion to end the scourge of double dividend taxation, Bush is telling us that his top priority is removing the tax from a relatively obscure form of income that typically only the very wealthiest Americans enjoy. This project has nothing at all to do with kick-starting the sluggish U.S. economy. It doesn't put more money in company coffers to invest in new equipment; it doesn't create jobs; it doesn't put more money in most Americans' pockets to stimulate demand.
In fact, the urgency with which Bush is now approaching the dividend issue is difficult to fathom. Correcting the tax-code distortion seems a largely theoretical, academic issue. Or perhaps there's some more than academic interest in this proposal from the president's portfolio-heavy contributors.
Who knows? Trying to understand why the dividend tax has suddenly risen to the fore of Bush's agenda is like trying to understand why he feels that Iraq is an imminent threat to the American people and economy while nuclear-sabre-rattling North Korea is not. This is a president who doesn't seem to care much whether his program makes sense, as long as he can sell it.
As Bush told Bob Woodward about the way he runs Cabinet meetings, "I do not need to explain why I say things. That's the interesting thing about being the president. Maybe somebody needs to explain to me why they say something, but I don't feel like I owe anybody an explanation." If Bush won't even try to explain himself to his most trusted advisors, can a lowly citizen expect any kind of answer?