View From a Height
Commentary from the Mile High City
Tuesday, January 14, 2003
Molly Ivins is at it again. Her Sunday column refers to John Allan Paulos's Innumeracy, but her own economic illiteracy is jaw-dropping. She runs a bunch of numbers about how the people paying the most in taxes will - surprise! - benefit the most from the dividend tax cut. She accuses the Republicans of wanting "Enron Accounting," by wanting to make more reasonable estimates of future economic growth. She claims that tax cuts are the reason that states are having budget problems. She accuses the Wall Street Journal of "paranoid fantasies" for considering her hatefully class-warfare rhetoric to be, well, hateful class-warfare. And, of course, it's all a result of bad campaign finance laws. And I thought the high schools were supposed to have been better 40 years ago.

Let's start with the dividend tax cut. The point of this tax cut is to end the double-taxation of corporate profits. There are only two ways to do this: eliminate the corporate income tax, or eliminate the tax on dividends. I think we can be fairly certain that a plan to eliminate the corporate income tax would send poor Miss Ivins to the hospital, further taxing our already over-burdened health care system. Eliminating the dividend tax helps long-term investors interested in the health of the companies they're buying stock in. Day-traders who all thought they could game the system a few years ago won't see a dime from this (and shouldn't), since they rarely hold stocks long enough to qualify for dividends, anyway.

The reason for the dividend tax cut is to make dividends more attractive to investors, not to pump money into the system. While most investors may have their money in tax-exempt, or tax-deferred accounts, most money invested is taxable. Corporations are as likely to change their policies in response to a few heavy hitters as they are to appease the masses of investors. This will force companies to measure success by cash, which is real, rather than by balance sheets and income statements, which are not. Miss Ivins may not be old enough to remember the hundreds of companies that went bankrupt in the last 40 years with strong balance sheets. Investors do. And now, they will reward companies that actually make money. This will not stifle innovation; venture capital still exists. But it will mean that ongoing concerns will be held to a higher standard of performance.

As for the "Enron Accounting" that the Republicans supposedly want, this is a case of selective modelling. Let's use models for taxation, models for spending. models for the environment, models for the census. Let's use models to give more money to inner cities, models to show we're turning the planet into an oven, models to "prove" we're about to run out of money. But use a model to show the economic and revenue effects of tax cuts, and all of a sudden we're heading for Accounting Armageddon.

Let's be real. Economic processes are understood reasonably well, but that understanding is imperfect at best. I remember Omni magazine, when it could still tell science from science fiction, published what a number of a models predicted for the economy if Reagan's tax cuts were enacted. One of them got it right, the others were all too pessimistic. Environmental models, which purport to prove whatever they purport to prove this decade, model far fewer variables accurately, and leave out or guess at far more. But Democrats treat them like the backward villagers treat then infallible god in some third-season Star Trek episode. For some reason, Miss Ivins neglects to mention this in any of her global warming columns. By all means, model away!

The reason states are having budget problems is that they didn't model properly - for a recession. Sure, some of them cut taxes, and they saw the highest growth rates. Many others, like, oh, California, are looking at bankruptcy because they behaved like Anna Nicole with a blank check. "Ooooh, those light rail subsidies are just so cute!" They built long-term obligations out of a short-term boom. But without the tax cuts, they might not have had the boom in the first place.

And then, at the end, just when you thought the long nightmare had ended, comes the plug for campaign finance reform. This isn't even worth arguing any more, except that for Miss Ivins, what works for politicians (incentives to appease their big contributors) doesn't work for corporations (incentives to appease their big investors).

Maybe what we really need is another book, An Economist Reads Molly Ivins. Paul Krugman need not apply.

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