Personal Finance > Tax True or False
Mutual Funds
True or False
Questions about Taxes and Tax Issues,
Answered by the Editor.

If President Bush is to be believed, the tax cuts that he will propose will help each and every American. True or False?

False

President Bush is a tried and true supply side Republican. And to his credit, there are two things that he understands and has made the basis of his career in government, first on the state level, and now on the federal level. The first is cutting taxes and his devotion to making reparations to the Bush, Sr. reputation.

Since 1913, when the individual income tax made its debut, the Democrats have earned their reputation as the party who raises taxes to pay for services. Over that time frame, the Democrats have boosted the individual tax six times, compared with their attempts at lowering it only twice.

The Republicans, on the other hand, have found the means to reduce taxes all but once during that time frame and it was Bush41 who broke the string. In no way am I saying that the

current Bush is spearheading his policies to fix Daddy's reputation. What I am saying is, tax cutting is what a Republican does. But it is important to note that during that time frame, those tax cuts have done little historic good for the folks who need it.

The thinking goes like this. Republicans tend to have more money. Republicans tend to be more self sufficient as a result of this greater wealth factor, shunning vital services such as Medicaid and generally not taking advantage of earned income tax credits. They are more likely to receive dividends from their investments and if they earn more, as a result, they tend to pay a greater amount in the way of taxes.

The last part is the impetus behind the Bush tax package. He knows that his party is supporting far too many Democrats and because poor folks tend not to vote, cutting taxes for those that tend to go to the polls, guarantees one thing.

Votes. That and no one can disagree that the situation that Democrats have found themselves, is not the best.


Can the recent proposal to end the double taxation of dividends have any real effect on you? True or False?

False

The word dividend in tandem with tax relief has everyone looking at companies whose bottom line is healthy enough to distribute the wealth with their shareholders. Many of these companies are stalwarts of staid industries which translates into old school businesses which further translates into non-tech. But who wins if the tax free zone is extended to include these payments?

Perhaps it is easier to focus on those that would be hurt by such a move by the administration. If your fund relies on growth to makes it's mark, this will not help you. Value companies do pay some dividends but those that do are few and far between. So value investors will find little to cheer about. REITs already have some sort of dividend deduction plan in place so there would be no added benefit to increasing your portfolio percentage to take advantage of the cut. Municipal bonds would not be affected. Their tax exempt status wouldn't change but their possible attractiveness might and not to the upside.

Funds whose investment charters suggest equity income have long based their performance on dividends and would benefit somewhat from the change in the code. These funds are still treading water with the rest of the group and may not see any instant relief should the dividend suddenly become tax free.

Here is why folks are getting so excited about the prospect. This double taxation works like this. Companies pay taxes on profits and then those that payout dividends redistribute those profits to shareholders. Then these dividends are taxed again at shareholder level. This cuts the real profit generated by the company by over 50% in most cases. This has definite pressure on the willingness of the investor to save or invest.



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