[Congressional Record (Bound Edition), Volume 149 (2003), Part 4]
[Senate]
[Pages 5429-5430]
[From the U.S. Government Publishing Office, www.gpo.gov]




         DOUBLE TAXATION OF DIVIDENDS AND CORPORATE GOVERNANCE

  Mr. CRAIG. Mr. President, I come to the floor this afternoon to speak 
with my colleagues as chairman of the Special Committee on Aging. Every 
person in this Chamber, every Senator, has an abiding interest in the 
welfare of America's seniors. The issue I wish to speak to this 
afternoon is, No. 1, how double taxation unfairly targets older 
Americans and the disastrous effect of the dividend penalty on 
corporate governance.
  During the first week of February, the Aging Committee held a hearing 
entitled ``Tax Fairness: Does Double Taxation Unfairly Target Older 
Americans?''
  Those attending the Aging hearing learned that older Americans, both 
working and retired, are subject to double taxation more than any other 
age group in the United States. Just yesterday, Larry Kudlow, 
economist-spokesman on Fox News, a television commentator, was here to 
speak to many of us on the issue of double taxation. Older Americans 
are literally being taxed to death by their own Government.
  Let me share with you three reasons seniors are double taxed. The 
reality is, first, many seniors pay taxes twice on Social Security 
benefits. Secondly, the Government collects the death tax when a senior 
passes on. Third, dividend income is also taxed twice; it is taxed once 
at the company level and again at the individual level. Older Americans 
are more likely to hold investments that pay dividends than any other 
age group. Over 70 percent of all taxable dividend payments are 
received by Americans age 55 and older.
  Clearly, eliminating the dividend penalty will benefit older 
Americans and seniors who have worked hard all of their lifetime, 
sacrificed, and saved a nest egg for their retirement. More than 9 
million seniors age 65 years and older, many on fixed incomes, rely on 
dividend income to make ends meet from month to month. The average--and 
this is an important figure because, remember, our critics are saying, 
but this is just for the rich; remember, 9 million seniors, 65 years of 
age and older--dividend income for these taxpayers is a little over 
$4,000 per year. But $4,000 additional money per year for someone 
living on a fixed income is a substantial amount of money.
  Let me share with you the testimony of one of the witnesses at the 
Aging Committee hearing, Dick Buxton from Idaho. Mr. Buxton was there 
to talk about the beneficial impact of ending double taxation on 
dividends and what it would do to his father and mother-in-law. His 
father is 89 years old, a railroad retiree; his mother-in-law is 91 
years old and a retired schoolteacher. They both worked very hard all 
their lives, saved a little money, and invested in corporations that 
paid dividends as a part of their life savings to benefit their income.
  They are not wealthy people. They are what is clearly part of the 
number I am talking about. They are not retired Wall Street investment 
bankers. They are not wealthy heirs to family fortunes. These are the 
middle-class seniors who were frugal throughout their lifetime and 
saved a nest egg for retirement. These are the faces of seniors across 
the country who should not be penalized for saving. That is what our 
President has said, and that is one of the reasons he has offered up 
the opportunity to take down the double taxation of dividends. These 
are the kind of people who would benefit clearly from the abolition of 
that double taxation.
  Ending the dividend penalty not only benefits older Americans. It 
gives a much needed boost to our economy. It also makes corporations 
more accountable. At the hearing, we learned that restoring trust in 
ensuring the honest financial management of our Nation's companies is 
extremely important as an issue of this moment in our Nation's history. 
Larry Kudlow spoke very clearly to that issue yesterday, that it is a 
unique time in our Nation's investment history, and we need to give 
this area of our economy a jolt. Improving confidence in our financial 
markets is critical to all workers, retirees, especially after the 
Enron and WorldCom debacles.
  How would ending the dividend penalty improve corporate 
accountability? Well, dividends don't lie. You either have the cash to 
pay them or you don't. Increases in dividend payments would provide a 
clear and unmistakable signal of a company's strength and viability in 
the market to the average person who would invest in that company. No 
corporate report, no message by a corporate executive saying: Here is 
what we are going to do, and here is how we are going to bump the 
stock, and here is the game we are playing for all of your investors as 
the story. The story is, are we making a profit and are we paying a 
dividend. That is kind of the old way that created the stability in 
corporate America that most investors began to rely on years ago.
  Dividends signal stability. They encourage shareholders to hold for 
the long term even when companies go through tough times. For example,

[[Page 5430]]

Bristol-Myers is a company that has gone through tough times recently. 
The current annual dividend is $1.12, with a yield of about 5 percent. 
Investors know Bristol-Myers is basically a sound, healthy, productive 
company.
  The dividend is a big part of investor confidence in the long-term 
strength of a company. The psychology of shareholders changes with 
short-term to long-term as it relates to the value of dividends and 
when those dividends go up.
  Dividends encourage internal investment in only the best ideas. 
Dividends are taxed at a much higher rate than capital gains. The 
higher dividend tax encourages companies to hoard cash rather than pay 
it out in dividends. The dividend penalty causes too much money to be 
chasing too few good investment ideas. We have seen that in spades as 
companies have come tumbling down as a result of bad decisions made by 
corporate America.
  One of our experienced witnesses known as an expert, Hillary Kramer, 
who is often on television and has her own program, speaking to the 
stability of investment, spoke about United Airlines. Over the past 
couple of decades, UAL invested their cash in Internet ventures and car 
rentals and hotels. United Airlines ventured out of their core 
competency; that is, getting people from one spot to another on an 
airliner, in part because the Tax Code pushed them in that direction. 
Shareholders might have been better served if they had paid a higher 
dividend instead and stayed with the business of efficiently and safely 
moving people through their airlines.
  The dividend penalty diverts cash away from shareholders into bad but 
tax-favored activities. On the other hand, paying cash out in dividends 
encourages stockholders to channel the cash into the most productive 
investment opportunities available inside and outside the company. This 
encourages management to be more careful and prudent when investing 
cash. After all, this is cash that is owed to the stockholder or owned 
by the stockholder.
  The dividend penalty encourages a dangerous buildup of debt and 
discourages using cash to finance internal investments. Heavy business 
debt makes companies less stable. The cost of debt is artificially low 
compared to using cash because of the double taxation of dividends. 
Interest payments on debt are subsidized by the Tax Code as an expense. 
In other words, we encourage corporate indebtedness by this very 
method. Dividends, on the other hand, are taxed now at a rate of nearly 
70 percent, second highest in the world. The first highest is Japan. 
The flattest, most stagnant, economy in the world today is Japan.
  There is a simple and clear explanation. We all know that if we want 
more of something, we subsidize it; if we want less of something, we 
tax it. Remember, heavy debt has been associated with many of the 
recent large bankruptcies about which I have spoken.
  You will remember that Enron had significant debt levels, among other 
things, that it had most of its problems investing in a variety of 
areas outside of its core competence. The Tax Code encourages debt and 
discourages dividend payments.
  The double taxation of dividends encourages the creation of 
noncorporate entities. These noncorporate entities include partnerships 
and limited liability corporations. Again, Enron left many of its debts 
off the books. As a result, Enron overstated profits by some $400 
million in its annual reports. Noncorporate entities do not pay double 
taxes like corporations.
  Many of the scandal-ridden companies that imploded over the past few 
years had created several noncorporate entities--in part, to escape 
double taxation. Again, the Government says to do one thing--be honest 
and straightforward. But the same Government encourages complexity and 
dishonesty with its very own tax policy.
  A year ago, Professor Jeremy Siegel of the Wharton School of Business 
wrote in the Wall Street Journal:

       Nothing could possibly excuse Enron, Arthur Andersen and 
     other firms from their deceptive and fraudulent practices. 
     But cries for accounting reforms, transparent earning 
     reports, and audit independence will not amount to anything 
     [other than to slightly discourage this effort] if the U.S. 
     tax system encourages firms to do just [what Enron did].

  The double taxation of the dividends is hurting efforts to prevent 
corporate corruption. The frustrating thing is that even after enacting 
tougher penalties for corporate crooks, it may be wasted effort, unless 
we end the double taxation penalty. The incentive is backward, Mr. 
President. If we have learned nothing over the past decades, we should 
have learned that incentives do matter.
  I would venture most of us in the Chamber agree that ending the 
double taxation of dividends is good for older Americans and it is good 
tax policy. It would be a shame for us to cast aside good policy 
without a fair and honest appraisal.
  I urge my colleagues to support the effort to end the double taxation 
of dividends. We can help improve corporate accountability by proper 
tax policy, while greatly helping America's seniors.
  In conclusion, I will quote one of the expert witnesses who testified 
at our hearing, Hilary Kramer:

       Abolishing the double taxation of dividends is about 
     keeping companies honest, competent, and resourceful. . . .

  I say we end the dividend penalty now for the sake of our seniors, 
who are the savers and investors in stable investments, and who live on 
fixed incomes, and for the sake of returning trust to the governance of 
corporate America.
  I yield the floor.

                          ____________________