In their responses to the State of the Union Address in late January, Democrats charged that President George W. Bush's tax plan, particularly the repeal of double taxation on corporate earnings and shareholder dividends, would benefit only giant corporations and the rich. But at least one of those big corporations has come out swinging against the tax cuts: the Big Five accounting firm of Grant Thornton LLP.
Based in Chicago, Grant Thornton claims in a press release that repealing the tax on dividends "is likely to have a negative impact." Proponents of the Bush plan say opposition from Grant Thornton is revealing. They maintain that the only "negative impact" the dividend repeal and other reforms to simplify the tax code and eliminate double taxation would have is on accounting firms such as Grant Thornton and other businesses that feed on the mind-boggling complexity of the current tax system.
"We want to make it the buggy-whip industry," says Rep. Chris Cox (R-Calif.), chairman of the House Policy Committee and the fifth-ranking Republican in Congress. The "it" to which Cox was referring as he spoke with INSIGHT in his office in the Rayburn House Office Building is the monster accounting industry that feeds on the victims of the vast and convoluted tax code and therefore lobbies against repeal or reform that would simplify the system.
A tax-reform and tax-cut champion since he came to Congress in 1989, Cox has seen this type of lobbying before. Big life-insurance trade groups, such as the Association for Advanced Life Underwriters, lobbied hard in 2001 against the Bush administration's phaseout of the death tax on estates, which Cox and other conservatives had been pushing to eliminate since the early 1990s. The companies they represented sold life-insurance polices to help families pay the tax and pass the family business down to their children. "There are decades and decades of financial arrangements that have been made based upon the tax structure we've had in the country for so long," Cox says. "There are so many economic interests affected by the code now that thoroughgoing reform is opposed from myriad directions."
Yet Cox is optimistic that reform, over time, can be achieved. "If we are relentless in our pursuit of simplification, we inevitably will make progress," he says. Cox sees the repeal of the tax on dividends, as well as the "death tax" or estate-tax phaseout passed in 2001, as good steps toward getting rid of double taxation on income that is saved.
"Eliminating the double tax on dividends also is simplification," says Cox, the main sponsor of the repeal bill in Congress. He first introduced a bill to end the double tax on dividends in 1992, and had argued in his thesis at Harvard Business School in 1977 for its abolition. "When you eliminate a whole class of taxation, it ultimately is simplicity," he says.
So Cox and other reformers aren't in the least surprised that an accounting firm such as Grant Thornton, which profits hugely from the complexity of the tax code, would resist repeal of this tax. In a press release, the firm states that repeal will hurt the midsize companies it serves by "encouraging investors to abandon the middle market in favor of companies that pay dividends." Grant Thornton claims that, "unlike large public corporations, which attract equity investment by paying dividends, many middle-market companies are closely held businesses that finance growth by reinvesting profits in their company."
Economists with whom INSIGHT consulted said the Grant Thornton analysis is false on its face. First, they say, many large public companies, such as Microsoft Corp., have not paid dividends because of the tax penalty to shareholders. Instead, they retain earnings and buy up smaller companies. But, if dividends weren't double-taxed, "you would have less pressure for corporate mergers and more growth of independent companies," says Stephen J. …