But what about capital spending?
Cutting dividend taxes is a nice idea, but would it eliminate the biggest anchor weighing down the U.S. economy? Only in a very circumspect way at best, and maybe not at all, according to economists.
By Larry Dignan
Feb. 4, 2002
|
In the end, it may not matter for the economy whether the President's plan passes or not.
President George W. Bush wants to accelerate income tax cuts passed in 2001 and end taxes on cash dividends paid to shareholders -- the so-called double taxation of dividends, given that corporations already pay taxes on their profits. And although some critics may question the timing when the U.S. government faces a budget deficit and probably war, almost no economists argue with the basic principle of cutting dividend taxes.
But for the overall economic picture, there's just one problem: the impact of the President's proposal may be muted when it comes to capital spending -- the long running bugaboo of the economy for the past three years.
According to the President's outline, moving up previously-approved income tax reductions and eliminating dividend taxes will will "promote investment by individuals and businesses." While Bush's plan could cut consumers a break, the latter part of that phrase seems to be the wild card, say observers. The American consumer has propped up the economy since 2000, but businesses have been reticent to spend more. And given that the Conference Board's closely watched Consumer Confidence Index fell to a nine-year low of 79.0 in January from a revised 80.7 in December, it's time for business to step up.
The reluctance by corporations to spend has hampered a recovery in technology spending -- which is more than a third of all capital expenditures -- and put the kibosh on other investments. The big question: Will Bush's stimulus plan boost capital spending? On that front, the jury is out. There are a few believers, lots of vocal non-believers and a handful that expect no impact at all.
"He's trying to kick start capital spending, but industries are awash in overcapacity," said Jeffrey Saut, strategist with Raymond James.
Keep in mind that the final economic package that will be passed by Congress likely will be so altered from the President's original plan that you won't recognize it. "This is an exercise in mental masturbation until you know what you're dealing with," Saut said.
Nevertheless, lots of folks are weighing in -- especially on the plan to cut dividend taxes, arguably the main way Bush's plan could boost capital spending. For example, on Wall $treet Week with FORTUNE's Jan. 24 program, Brian Wesbury, chief economist for Griffin, Kubik, Stephens and Thompson said Bush's plan will provide some economic relief. Meanwhile, Jim Glassman, a resident fellow at the American Enterprise Institute, noted that a dividend tax cut will boost investment, but not immediately.
Supporters of the view that Bush's plan will boost capital spending rely on the argument that eliminating the double taxation of dividends will create a more efficient use of capital. "Cutting dividend taxes should boost capital spending," said Stan Feldman, a professor at Bentley College. "The biggest impact is it frees up resources for more useful purposes."
According to Feldman, the double taxation on dividends helped encourage companies in the 1990s to use cash on "unreasonable acquisitions" and other misguided choices. If it made sense for companies to issue dividends to shareholders, they would have made better moves with their cash and be less reliant on debt. That cash, which would then be given to shareholders potentially tax free, would then be able to allocate the money to companies that were growing, thereby boosting capital spending. "Ending the double taxation of dividends will force efficiency," said Feldman.
Although it sounds like a roundabout way to boost capital spending, Feldman said a dividend tax change could boost capital spending quicker than currently expected.
Feldman could be right, but Robert Klemkosky, a professor at Indiana University’s Kelley School of Business said there might be a quicker way -- cut dividend taxes on the corporate level. If Bush made that move, it would effectively boost after-tax profits at corporations and free up cash for more investment. The catch? Bush -- whose plan is already being criticized by liberal critics as a sop to the rich -- would be under fire for helping out companies. "(Cutting dividend taxes) would be more effective at the corporate level, but that would be political suicide," said Klemkosky.
Simply put, without a little political pain, dividend taxes and capital spending may not be that closely linked. Other observers note that cutting the dividend tax will change corporate structure, but have no impact on capital spending. Some analysts maintain that capital spending could actually fall -- companies will be encouraged to give out dividends instead of investing in their businesses. "There could be unintended consequences," said Richard Nash, chief market strategist for Victory Capital Management.
Nash said in the current environment issuing dividends may look better than capital spending, thereby reducing business investment.
In case Bush's dividend plan doesn't help capital spending, there is a back-up plan. A key part of Bush's plan calls for small businesses to be able to write off expenses up to $75,000 indexed to inflation. That would triple the current $25,000 limit. The move would encourage small businesses "to buy technology, machinery and equipment they need to expand," according to the Bush outline.
Analysts say the small business help is needed, but it's not clear whether it'll provide a capital spending jolt. Why? Many small businesses count big
businesses as key customers. And if the big businesses aren't spending it may not matter how much the small ones can expense.
Meanwhile, previous efforts to boost capital spending by accelerating depreciation for technology haven't influenced spending. Given all the moving parts, many analysts aren't sure that Bush's economic plan -- or any other proposal -- will boost the economy. The economy is hampered by overcapacity in the technology and telecommunications sector. And other sectors aren't faring much better. Klemkosky said industries such as steel and automobiles are also awash with excess capacity due to globalization.
Couple that capacity glut with the fact the economy is coming off a bubble and analysts reckon that both Washington and Wall Street are being held hostage by
the business cycle. Until profits improve, any plan to boost the economy will fall short.
"Business may not be spurred to invest no matter what you do," said Nash. " 'Here's some money to buy a machine you don't need' isn't a good business decision."
|
