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Alan Greenspan Comments

Comments on Double Taxation of Dividends and Subchapter S Corporations

Oversight Hearing on the Federal Reserve's Second
Monetary Policy Report to Congress for 2002
10:00 a.m., Tuesday, July 16, 2002 - 216 Hart

Alan Greenspan
Chairman, Board of Governors
Federal Reserve System


Senator Robert Bennett (R-UT)

The following is our transcribed excerpt of Alan Greenspan’s responses concerning double taxation of dividends and subchapter S corporations during the question and answer period:

Senator: Tax treatment of dividends. Dividends, like capital gains, represent a return on capital. Dividends as a measure of corporate performance as opposed to managed earnings as a measure of corporate performance.

AG: I remember, as you do, when yields on stocks were 5 and 6 percent, this goes back 50 years, people bought stocks for dividends they did not buy them for earnings, and one of the problems that we did not have back then was that earnings manipulations were not very important because nobody cared. Earnings are very difficult to estimate and in fact there is no such thing as an objective earning level of incorporation until the corporation is fully liquidated, so earnings are always provisional--cash dividends are not, and, indeed as I indicate in my prepared remarks, there is a question here as to the value of cash dividends inducing corporations to start to build up cash and in that process probably think in terms of increasing cash dividends. Now that changed very dramatically and indeed there is another element here which is, remember, one of the reasons why dividends as a means of pay out have not gone down somewhat is that there has been an awful lot of stock buy back which effectively does not address the question of taxation. At root this question was fundamentalized, in fact this question really gets down to the double taxation of dividends and the issue of the integration of the corporate tax with the individual tax, and I think a lot of economists will tell you that it is an extraordinary useful and efficient way, if you can do it, to put all the tax burden on shareholders and not have double taxation of dividends thru taxing the corporation and then taxing the dividends again. My only question is that we ought to have a very large expansion of subchapter S corporations which effectively would enable dividends to be paid out and effectively taxed only once. I don’t expect that to happen at this particular stage and there are very good reasons why, problems of revenue are creating concern, there are issues of equity, but if you ask as an economist and looking strictly at the question of the optimum allocation of the system eliminating double taxation of dividends is a very valuable thing to do and indeed, as you may be aware, the secretary of the treasury has very strongly been proposing that.

Senator: The corporation I managed was an S corporation and as shareholders in that corporation we could make the decision as to whether or not we were going to leave the money in the company to make it grow or take it out, and since there were no shares to sell in the public arena, the whole question of stock options didn’t come up so we watched very carefully the amount of cash accumulating in the company and the amount we could take out in the form of dividends, and as you say it was not double taxed.

Source: U.S. Senate Committee on Banking, Housing, and Urban Affairs


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