SeaViews: Insights from the Gray Havens 
July 2002

Motto: The surest way to get a reputation for being a trouble maker these days is to go about repeating the very phrases that the Founders used in the struggle for independence.

-- C.A. Beard

Disclaimer: The editor speaks only for himself, and sometimes even he is wrong.


email Serge
Anon ftp site
News Archives

Standard disclaimers apply. In addition, the author makes no guarantees concerning the grammatical accuracy of his writing. Submitted text files must be in raw or compressed (.Z, .gz or PK Zip) ASCII. Image files must be in jpg.

On last month's Fix;

the answer to last month's Fix,
""Is it an acceptable policy for an employer to prohibit employees from  publishing a web page on their own   machine on their own time, given  that said employer accepts Federal dollars?""


David Gay is correct in pointing out that this is really 2 questions: do people have free speech and can an employer fire you for exercising it?

It is clear that a private sector firm can fire anyone for whatever reason if they don't mind the resulting lawsuit. However, any institution accepting federal dollars (be it school, health care organization, etc) is bound to uphold the US Constitution. This hook has been used to strip hospitals of XMas decorations under the "Separation of Church and State" doctrine. Well, it applies equally to free speech. The Univ of Wash could not fire employees who publically supported state Congessional candidates who would have cut funds, as long as they did it on their own time and money.

On the Mantra of the Week;
 A new service! Each week - see if you can catch the DNC or national media mantra of the week.

Guest Editorial:

Bruce Bartlett

August 1, 2002

The problem with double taxation

As investors look for long-term fixes to the stock market's problems, new attention is being focused on the role of tax policy in encouraging them. In particular, the double taxation of corporate profits led managers to change corporate financial policies in ways that contributed to current difficulties.

When an individual or a group of individuals in partnership form a business, they face just one layer of taxation on their profits. These are taxed only by the individual income tax at rates that now go up to 38.6 percent. But if they choose instead to organize as a corporation, they pay an extra tax of 35 percent at the corporate level, plus the individual tax on after-tax profits paid to shareholders. Thus the total tax rate on corporate profits is 60 percent, versus 38.6 percent on those earned by a sole proprietorship or partnership.

This has long made the corporate form of business disadvantageous from a tax point of view. This is offset to some extent by the limited liability that corporations enjoy, endless life and easier access to capital. Nevertheless, there is no logical reason why two businesses of equal profitability should pay sharply different tax rates on their earnings based solely on their legal form of organization.

One consequence of the corporate income tax, which came into being in 1909, is that it has lessened shareholder control over corporate assets. A key way shareholders exercised control in the pre-corporate tax era was by demanding that firms pay out a large percentage of their profits in the form of cash dividends. Among other things, this helped guarantee that corporate earnings were "real" and not based on creative accounting. At this time, it was common for companies to have a dividend-price ratios of about 5 percent.

Eventually, companies and shareholders figured out that it was mutually beneficial either to retain corporate profits, thereby raising the value of company assets, or use those profits to buy back shares on the open market. The effect of both strategies is to raise stock prices. Thus, shareholders get their earnings in the form of capital gains, rather than dividends. Not only are capital gains more lightly taxed than ordinary income, but shareholders themselves decide when to pay the tax, since capital gains taxes are assessed only when shares are sold.

The flexibility afforded by receiving one's profits as capital gains allowed sophisticated investors effectively to pay nothing except the corporate tax. They could eliminate even the capital gains tax on their shares by realizing gains only when they had offsetting losses, or by borrowing against their shares.

As a consequence, there has been a steady decline in the number of companies issuing dividends and the amount of such pay-outs. According to economists Eugene Fama and Kenneth French, the percentage of large companies paying dividends in a given year has fallen from 68.5 percent in 1978 to 21.3 percent in 1998. Over this same period, the dividend yield fell from 5.28 percent to just 1.49 percent. In effect, most shareholders are now getting virtually all of their investment returns from capital gains rather than dividends.

Unfortunately, in the process, investors lost an important source of control over the assets they ultimately own. Freed from the need to come up with hard cash to pay quarterly dividends, corporate managers had much more flexibility in how to present a company's performance to shareholders. Although Securities and Exchange Commission rules and accounting conventions theoretically kept them honest, inevitably there were gray areas that could be exploited by aggressive managers.

Another consequence of double taxation is that companies began raising less of their capital from issuing shares and more from selling bonds. This made sense because interest payments are tax-deductible, whereas dividends are not. In 2001, U.S. companies paid out $554 billion in interest, versus $417 billion in dividends. However, this increased leverage makes them more vulnerable to economic downturns and often pushes companies into bankruptcy when interest payments cannot be met.

For these reasons, many economists believe it would be much better for companies to go back to paying dividends, and rely more on equity to finance expansion and less on debt. Paying dividends will reduce the incentive to use creative accounting, and more equity will help companies ride out temporary downturns. (Dividends can be reduced or suspended when profits fall -- interest payments cannot.)

But these beneficial reforms will not occur as long as the Tax Code continues to double tax corporate profits.


1. Subject:         RE: last call
   Date:         Thu, 1 Aug 2002 09:59:13 -0500
   From:        "Gay, David" <>
     To:         "'Serge'" <>

 "Is it an acceptable policy for an employer to prohibit employees
from publishing a web page on their own   machine on their own time,
given that said employer accepts Federal dollars?"

There are 2 issues here. Freedom of association and government
control because of government funding. A person has the right to say
anything he wants. Does an employer have to keep an employee no matter what he
says? I don't think so, otherwise we could mandate that journalists have
Conservative friends and men could go to women's only health

Check out this link

Ed: I'm lost, how does Free Speech of an employee permit enforced assoc. by an employer? And for the second, why not - women demand to go to men only golf and health clubs now.

Quote(s) of the month:

"If this was Wisconsin, he wouldn't have a chance."
-- UVA Poli Sci Prof. Larry Sabato, on Sen. Torricellis chances for reelection.

Fix of the month:

"Given the  markets positive response to the Ethics in Business Act, should the Bush Admin call for more invasive Federal control of corporate finances?"



1. Aug 1, Bainbrigde Is: Kevin Lawrence, founder of the Island Health Club and Zenetix Corp, was indicted on 64 counts of SEC Filing fraud. Three associates plead guilty. If convicted, Lawrence faces 560 years. 


1. St Paul, July 29: In a move designed to bring the law into symmetry, the State Supreme Court has decided that just as the DNR can no longer invade fishing shanties on the ice without probably cause, now the same applies to boats. In other words, the boat owner is protected under the 4'th and 5'th ammendments. Predictably, the DNR Game wardens have cried that this will hamper their efforts to catch poatchers, over limit anglers, and generally cuase the further decay of civilization. Naturally, the eldery and children are expected to be the worst hurt.

Washington D.C.

1. Aug 1: Iraq leader Sadaam Hussein, sensing that teh US may be gearing up for an invasion, has once again held out the teaser of allowing UN weapons inspectors. But Secy of Defense Rumsfeld pointed to intelligence reports that Iraq is looking for neutron resistent steel as evidence that a nuclear weapon program is alive and well in Iraq.

2. July 28: The Senate "severly admonished" New Jersey D. Senator Bob Torriceli, who was caught on audio tape accepting numerous bribes from a PAC advisor who is now in jail. Senate Rep. point out that the only reason that Torricelli has not been thrown out of the Senate is that Majority Leader Tom Dascle (D. SD) realizes he would lose his one vote margin in the Senate - and as Dascle point outs, if the Reps retake the Senate, women, children and the elderly will be the worst hurt.

 Asked if he though that the Sen would be reelected in Jersey, UVA Prof Larry Sabato said, "Probably, this is Jersey - not Wisconsin."

3. July 30: The US Ambassador to Peru has actively intervened on the part of Microsoft to prevent passage pf a bill that would have required all govt software purchases to be based on open systems. Alledegedly siting unfair trade tariffs, the Ambassador threatened an in kind US response against Puru inports to the US.