Asymmetrical Information

From the desk of Mindles H. Dreck:

The Boss' Plan is My Plan

I agree with the commenters on my earlier post that the administration's proposed rules on marking up shareholder basis are going to be a complex nightmare. Every broker and money manager will have to spend millions on record-keeping systems to keep track of basis at the lot level (what? We don't have a field for this!). As far as time spent on tax returns, well, this is a tax-preparer full employment act.

Pamela Olson (Assistant Treasury Secretary for Tax Policy) is quoted describing the plan in the WSJ article I linked. Poor Pamela - she has been a champion of tax simplification...up until now. This is her on December 18, 2002 speaking at the Tax Executives Institute (as printed in the New York Sun but not available on the web):

This is surely not a tax system anyone would set out to create, but it is the system that has evolved over time. Let's face it. We have reached the point where our tax system is held together by chewing gum and chicken wire....

....The following are the goals we (the administration) will strive to achieve:

1. A system that is simple and easy to understand, with reasonable filing and record-keeping requirements, and non-intrusive tax administration.
   
2. A system that is efficient and minimizes interference in economic decisions.
   
3. A system that supports the international competitiveness of U.S. business and workers.
   
4. A system that is fiscally sound, raising the revenues necessary for government operations.
   
5. A system that is stable enough to avoid the constant tinkering of years past.
   
6. A system that is understood to be fair, treating similarly situated taxpayers alike and equitably distributing tax burdens.

Well, the administration's formulation of dividend tax relief doesn't really achieve many of these goals. But, Pamela, you had me at (1)...

UPDATE: One of the reason's I am harping on complexity actually does go to the potential stimulus of the administration's bill. It seems to me that one of the necessary condition's to the Permanent Income Hypothesis, the premise on which we claim marginal rate relief stimulates investment, is that consumers and investors actually should be able to project easily their permanent increase in income. Anything that makes tax relief less transparent or certain will dilute the effect.

Another interesting comment in the prior post pointed out the potential generational differences in experienced relief. People who receive dividends as a meaningful part of their income tend to be older. Is the administration softening them up for social security reform?

I think policy has taken a back seat to politics. While this may be necessary to passage of any tax relief, it's a shame. Incidentally, David Frum, editorializing in the New York Sun yesterday, agrees:

..delivering the benefit to individuals rather than corporations makes reform look less like the elimination of an injustifiable disparity between two methods of finance and more like a juicy freebie for one class of the population, people who happen to own stock.

Burton Malkiel also weighs in today endorsing the policy:

My guess is that eliminating the double taxation of dividends would lead to a powerful rally in stock prices and would do much to lift the penumbra of uncertainty that has bedeviled both consumers and corporate managers. The U.S. is one of the few countries in the world where dividends are taxed at both the corporate and the individual level. Treating debt and equity in an equivalent fashion will eliminate a major distortion in the tax code.
In the longer run, the effect on corporations and the economy will be unambiguously beneficial.

Posted by Mindles H. Dreck at January 8, 2003 09:40 PM | TrackBack | Technorati inbound links