Posted on 01/06/2003 1:00:31 PM PST by Drewman626
This is long, but it’s something that I’ve wanted to write for a long time. This is a couple of points to keep in mind when discussing the upcoming Stimulus Package debate.
First off, my credentials. I hold two degrees in finance and economics. I've been in the banking and financial services industry for over five years. I am currently a financial and real estate investment advisor. I have securities licenses from the NASD as well as the states of Massachusetts and New York.
Ok.
The stimulus package is said to include (among other things):
- The elimination of income tax status of stock and securities dividends
- The extension of unemployment benefits.
- The expediting of the phasing-in of the already approved tax cuts currently scheduled to take full effect over the next ten years. The brunt of these expeditions would be for low and middle-income taxpayers.
My points are these:
Dividends
Approximately 51% of ALL stock and security dividends are paid to Senior Citizens. This is mostly from retirement accounts and annuities.
Most people... especially the people that will read only headlines and listen to the press coverage of this, don't even know what a dividend is.
A short definition: when someone owns a share of stock, they own a small piece of that company. Because of that, when the company makes money, after all expenses and taxes, they can take whatever income is left over and pass it out to their owners (shareholders). Usually, they don't pass all of it out... they take some of that net income and reinvest it in the company (i.e. growth and expansion).
Now keep in mind that dividends are paid AFTER they company pays its income taxes. Meaning, that income is taxed, then passed out to the owners, and taxed again as personal income. This is the infamous "Double taxation of dividends" that nearly ALL financial advisors and CPA's have been complaining about for over thirty years. If you don't realize the significance of passing this legislation, you need to talk to an Accountant. This is HUGE! This is what my industry has been hoping for decades! This is awesome!!!
What are the effects of the elimination of double taxation of dividends? Most people own stock via a mutual fund. A lot of those stocks in those mutual funds pay dividends... which are taxed... which is why the value of your mutual fund may go down, but you still get a tax bill at the end of the year. Now typically, those dividends (after taxes) are reinvested in your mutual fund account (401K dividends are not taxed until withdrawal... hence the 401k tax-deferred status). Now anyone who understands the power of interest can understand that the elimination of taxation on dividends would give people, over time, A LOT more money in their mutual fund accounts... A LOT MORE. This includes 401K's (no taxes paid upon withdrawal because no taxes due! HUGE), non-qualified retirement accounts, Variable Annuities, etc.
It's going to be argued by our opponents that only the rich will benefit from the elimination of double taxation of dividends (or any tax cut for that matter). Well, if their parents or grandparents are receiving distributions from their retirement accounts, they'll benefit. If they have a 401K, they'll benefit. If they own an annuity, they'll benefit. Also, banks determine their interest rates based on how much money they can make by investing your money. If they don't pay taxes on dividends, they make more money... thereby lowering loan rates and upping interest savings rates.
It will also be argued that this package will cost $600 billion. Anyone who listens to Rush already knows what I’m about to say.
A TAX CUT DOESN’T COST ANYTHING
By definition, a tax cut means that the gov’t doesn’t take it from you in the first place. A tax cut is not a budget line item. It’s not a COST.
Secondly, that $600B number is a “fuzzy math” number. Here’s what fuzzy math means: Let’s say you own a store that sells widgets. You price your widgets for sale at $100. You typically sell 100 widgets each month. So your revenue is $10,000 each month. Now if you reduce their price of your widget to, say, $80… well you just cut your revenue down to $8,000. That’s fuzzy math. The mathematical term for this is called Static Calculation. It doesn’t take into account the fact that if you lower your prices, you’ll sell more widgets. So let’s say that at $80, more people want to buy your widgets… and you sell 130 widgets each month. That’s $10,400 in revenue. This is how any store makes money buy selling stuff “half off! Thirty percent off! Until Saturday only!!!” This is called Dynamic Calculation. It’s a basic concept of supply and demand.
Sure, using Static Calculation, a tax cut reduces the amount of Tax Revenue to the Fed. But using Dynamic Calculation, it’s more than obvious that Tax Revenue goes up!
Here’s why:
A tax cut gives people more money to spend and/or save. The spending and saving of money INCREASES the amount of taxes collected by both States and the Federal Gov’t!!! This is a PROVEN economic concept that has been seen in action in the US in the 1980’s as well as in Europe and Canada over the past few years. It’s taught in Macroeconomics (Economics 101). It’s a tried and true concept that never fails. In this sense, a tax cut doesn’t COST anything…. It’s makes more money for the Fed.
Here’s how:
If people have money, they spend it or save it. If they spend it, thereby increasing consumer spending, they help to quicken the economy. When they buy, they pay sales tax (in most states). When a company sells something to that person, they pay income tax on that revenue. Tax Revenue Increase #1 (and the largest).
Now if the taxpayer saves the money instead (another common counterargument by our opponents), two things happen. One, the amount of money the bank has goes up. Now, without going too far into how banking works… a bank takes all the money that people have deposited there and invests it overnight every single night. They make money doing so. They pay taxes on the interest earned by doing so… Tax Revenue Increase #2. Two, when a bank has more money deposited in it, they are allowed to loan out more money. (This is called required reserves. They need a certain amount to cover daily withdrawals from customers, and the rest they’re allowed to loan out. This Required Reserves Rate is set by the Federal Reserve.) When a bank loans out more money, they earn more interest… that they pay more income taxes on… Tax Revenue Increase #3. When a bank loans out more money, that customer takes that loan and either pays off debt, buys a house, whatever… point being that that money is spent somewhere… thereby creating sales tax on the spending and income tax on the purchase revenue… Tax Revenue Increase #4. When a person saves money… that money earns interest… that interest is taxed… Tax Revenue Increase #5. When a person invests money, they either earn interest or eventually pay a capital gains tax... Tax Revenue Increase #6. (The investing of money also increases the overall value of the Stock Market... a very strong PERCEIVED measure of the strength of the economy... thus increasing Consumer Confidence as well as increasing the value of overall investments... thereby creating more taxable interest and more eventual Capital Gains tax revenue... call this Tax Revenue Increase #6B.) This is where the argument that “most people that get the tax cut will save the money, not spend it. That doesn’t help anyone!” falls apart. The banks pay income tax. The saved money earns interest, which is taxed.
And of course, finally… It’s a tax-cut for the rich. The Top 1% of taxpayers (anyone claiming more than $313K in annual income) pays 37.42% of all personal federal income tax. The top 5% (anyone claiming over $128K) pays 67.33% of all PFIT. The top 50% (anyone claiming over $27,682) pays 96.09% of all PFIT. Do the math. To be in the top 50%, you have to earn a mere $27,682. The average taxpayer making less than $27,682 pays an average of $598.03 a year in taxes (about $50/mn… a cable bill… a phone bill… groceries for half a week. That damn Athletic Club dues every school charges…). That’s a tax rate of about 2.14%. Let me ask you… how the hell are you supposed to cut that? Cut it to what, 0%? Fine, cut it zero… it’s a drop in the bucket compared to the other half of the county that pays over 96% of the taxes. Tax cuts should be for the people that pay taxes… Saying that a tax cut should be for those who most need it or would benefit from it is ok… but ANY tax cut, as already shown, helps the economy and increases overall Tax Revenue. When 1% of the population pays 37% of the tax bill, that’s just wrong. Especially when that 1% earns only 20% of the total income. Give a tax cut to the people carrying the heaviest load. (These figures based on IRS Report for Tax Year 2000 available on the IRS website or also on Rush Limbaugh’s website).
That is all.
Please reply or email with questions or responses. Thanks.
- Dman
Approximately 51% of ALL stock and security dividends are paid to Senior Citizens. This is mostly from retirement accounts and annuities.
I hope Bush will say this over and over to counter the attack that has already started from the left.
There is no history in tax legislation to pass tax free or tax preferred (ie capital gains or return of capital dividends) treatment of earnings through either annuities or retirement plans to the participants. I'd be very surprised if that was proposed. I suspect any preferred treatment of dividends would apply only to dividends received directly by the taxpayer.
And this is from the same @ssholes who LOVE to scare the geezers by claiming optional partially (2%) privatized SS accounts will " "fundamentally destroy the financial soundness" of the SS trust fund!!!
The hypocrisy of these DNC Clymers on social security needs to be pointed out at every opportunity!!!
Income isn't currently taxed when received by tax deferred account. You pay taxes as regular income when you make withdrawls, regardless of how the earnings are generated.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.