- The Washington Times - Saturday, January 18, 2003

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Henry Hazlitt, "Economics in One Lesson."

When confronted by still another vast, sprawling Ten Year Plan of tax cuts plus a mirror image from the loyal opposition, it's useful it's imperative to return to first principles and think clearly and simply about a subject that is anything but. They don't call economics the dismal science for nothing, and making it even more complicated doesn't make it any cheerier.
Every time I hear this administration or any other talk about the need for a short-term stimulus for the economy (Short Term Stimulus is today's acceptable synonym for a quick fix) I reach for my wallet to make sure it's still there.
I feel a lot better when this president simply says that taxing profits twice once when they're made and again when dividends are distributed to the stockholders doesn't make sense. Or for fairness. Or for a sound economy. Because taxing dividends encourages corporations to concentrate on driving up the value of their stock for speculators instead of making money for their investors. See the madness of the 1990s, or any other bubble era.
We all ought to be for repealing the extra tax on dividends not as a quick fix but as a fix, period. Not as a short-term stimulus but as a stimulus, and a matter of principle. Principle pays in the long run, and sometimes in the short.
The double taxation of dividends, long criticized by economists, has exerted the most perverse effects on the American economy. It has driven companies to fund themselves by borrowing capital instead of raising it through issuing stocks that pay dividends. Corporations have acted as if the purpose of being in business isn't to make money but to inflate the value of their stock, no matter what it takes. Some of the more notorious outfits (Enron, WorldCom) have played games with their books to inflate their stock beyond all reason.
Alan Greenspan tried to warn us. Only last year he was denouncing the inordinate greed of a stock market that focused on manipulating earnings reports to drive up the price of their stock instead of paying dividends. Make dividends attractive again by exempting them from taxes, and not just a measure of growth but a measure of discipline might return to the economy.
Freeing dividends from taxes is the centerpiece of the administration's economic program, but there are enough other proposals in it to choke a good-sized elephant. Some of the changes it proposes in the tax code are overdue, like extending unemployment benefits and increasing the tax credit for families with children. But let's be wary of plans to bail out state governments no matter how extravagant they have been.
It makes sense for Washington to help the states with programs that the federal government itself has mandated for them, like Homeland Security and Medicaid. But beyond those, the federal government shouldn't be meeting more and more of the states' responsibilities for them. Or soon we'll be back in the days of Revenue Sharing, when the states could opt for expensive programs without having to raise the funds for them. Even now politicians use the phrase "federal dollars" as a synonym for "free money." It's a dangerous tendency, for it leaves the states accountable to Washington rather than to their own voters.
This mix of state and federal governments is not just economically suspect but politically corrosive; it undermines the essence of real federalism: the integrity of both state and federal governments.
If we're serious about states' rights, then we need to get serious about states' responsibilities. The two go together. As with love and marriage, you can't have one without the other.
Every economic program, especially one as complex as this one, is overflowing with unintended consequences waiting to happen. But those that can be foreseen need to be. Let's not be distracted by the usual class wars. After all, every worker with a tax-exempt pension plan has a stake in getting the tax off his dividends.
More important, the American economy as a whole needs to grow faster and bigger and more honestly. Easing up on the tax brake would be the simplest, clearest way to create more investment, which means more jobs and more wealth for all of us. Just because an idea is simple and clear doesn't mean it can't be a good one.


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