Extra Point

March 2003

by Jack Tenney, Publisher

Taxes

So many things to ruminate on, so few worthwhile ruminations to share.

Oh well, let’s do dividends and tax policy for a while.

There is a move afoot, as you well know, to no longer tax dividend income earned by individuals. Like the elimination of estate taxes, them that’s got get more benefit than them that’s not. On the face of it, these proposals, like marginal tax reductions, will, if enacted, put a lot of pressure on the federal pocketbook while benefiting the very, very wealthy (VVWs) greatly.

Not to take sides against them that I want to be when I grow up (the VVWs), I nevertheless wonder if there aren’t some compromises and other ways to reduce taxes, invigorate the economy, and promote equity (both equity as in capital formation and equity as in fairness.)

I think back to Andrew Tobias’ old book The Only Investment Guide You’ll Ever Need. In those good old days, there was a dividend exclusion of $50 (later raised to $100 and then $200 and then whacked in 1981). Tobias recommended that everyone, even poor little smart guys like me, own at least enough dividend-paying stock to take full advantage of the exclusion because it was “Tax Free.” It didn’t take a Harvard MBA (like Tobias) to do the math that if you borrowed the money to buy the stock, you could arbitrage your way to a $20 windfall. He pointed out that one could actually earn more tax-free income by buying canned tuna fish in bulk (remember, he wrote this decades before Costco). He estimated a 30 percent savings for six months’ supply and, even though he didn’t do a net-present-value calculation, I had to agree that the savings were, indeed, tax-free.

Anyway, my modest suggestion would be to simply exclude the first X-many dollars of investment income (I would include interest income with dividends) until you got about 80 percent of the taxpayers happy. I would do the same with estate taxes.

Income taxes, I don’t know, but on Social Security taxes and Medicare, I do have two suggestions. The first, to stimulate the economy, I’d declare a holiday of about a year. That would split $756 apiece between a $10,000-a-year earner and that earner’s employer. Second, I would fire up the FICA and Medicare taxes the next year with no max cap. That would increase Derek Jeter’s (and every other lucky working stiff earning a few million every year) tax burden and his employer’s from a few thousand apiece to about $75,000 each. I think that would go a long way toward funding Social Security pensions, health care and maybe, even, a prescription relief deal.

I have to stop now, because the echo of my computer keys bouncing off the darn plastic sheeting over the windows here in my undisclosed safe haven is giving me a headache.