February 16, 2003

"Double Taxation" Subject of Article

The Champaign-Urbana News-Gazette interviewed J. Fred Giertz, professor of economics, and Firouz Gahvari, professor of economics, for a recent story on President Bush's proposal to eliminate the tax on corporate dividends.

Giertz noted in the article by Don Dodson that the president's proposal "has little to do with economic stimulus." Giertz commented that the plan has more to do with making sure that profits made by corporations aren't taxed more than profits made by other forms of business, such as sole proprietorshps and limited liability companies. White House estimates are that eliminating the tax on dividends would cost the federal government $364 billion over ten years.

According to Gahvari, the president's proposal is "not an effective exercise" to stimulate the economy. "This particular aspect of the president's economic package is not short-term. It's a long-term, supply-side plan." He went on to say that the proposal may not even achieve what it is supposed to achieve because of corporate tax shelters. The current system encourages corporations to borrow rather than issue stocks because interest payments by firms are tax deductible but returns to equity holders are not. However, while parts of corporate incomes are taxed twice, other parts go tax free because of tax shelters. And unless corporate tax shelters are eliminated and all corporate income is taxed, "I don't really see that the policy is going to reduce the incentives corporate managers have to retain income."

Also interviewed was Richard Kaplan, a professor in the College of Law, who commented on the implications of the change on individuals and their investment strategies.

The News-Gazette article is not available online.