MORE TAX WRINKLES….Here’s yet another

MORE TAX WRINKLES….Here’s yet another wrinkle in the Bush tax plan that I just now heard about: dividends paid by companies that report losses would still be taxable.

Think about this: you’re the CEO of a company, and as the end of your fiscal year rolls around it looks like you might show a small loss. But that means that the dividends you’ve been paying out will be taxable, so you’ll be under intense pressure to fiddle with reserves, or prebook business, or stuff the channel, or engage in some other accounting gimcrackery to turn your small loss into a small profit. Isn’t that just the thing that we’ve been trying to get away from?

Conservatives actually have a good point when they talk about the distorting effect of the tax code, and this is a good example. It’s also a good example of why it’s probably better to tax all kinds of income similarly: it prevents the relentless game playing where people try to move income from one place to another solely to get the best tax rate.

I’m not saying this is conclusive evidence that we shouldn’t tax different types of income differently, but there is a cost to doing it.

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