Weblog - Politics - 401(k) Lies

How did the lie about the dividend tax and 401(k) accounts appear in at least six columns and hundreds of newspapers in only five days?

It challenges the meanest credulity to suggest that this many columnists, writers and editors could independently make the same error.

15 Jan 2003
How did the lie about the dividend tax and 401(k) accounts appear in at least six columns and hundreds of newspapers in only five days?

The misstatement that "401(k) plan participants will not benefit for a repeal of the dividend tax, because these plans are already tax-sheltered" has been written by at least six columnists and has appeared in hundreds of newspapers since President Bush's Economic Stimulus Speech on 7 Jan 2003.

What is most interesting is that this provably false claim got such wide circulation in such a short time. Unlike the "tax cuts are only for the rich" slogan which the Left has been practicing for years, this claim is ad hoc and was on editorial pages in less than twelve hours. (E.g., Krugman, NY Times, 7 Jan 2003)
Other differences:
- The "401(k)" statement is precise and can easily be confirmed (or in this case, invalidated.) The "only for the rich" claim is a vaguely stated opinion.
- The "401(k)" statement is considerably more complicated, and about a more obscure point, than the "rich" claim.

It is apparent that these columnists are drinking from the same spittoon. It challenges the meanest credulity to suggest that this many columnists, writers and editors could independently make the same error. It is not clear, however, whether this is a careful plan to spread misinformation, or if these columnists and editors are simply in the habit of reading each other's work and taking it for fact.

One reason for the spread of this lie could be liberal media bias; however, I have seen few distortions in the Press that couldn't just as easily be explained by ignorance and laziness. The latter could also explain why most of the publications have not printed corrections.

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ANALYSIS OF 401(k) -DIVIDEND TAX CLAIM - adapted from letters to the Syracuse Post-Standard and the New York Times
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Re: Paul Krugman, New York Times, 7 Jan 2003 -
"If you have stocks in a 401(k), your dividends are already tax-sheltered; this proposal gives big breaks only to people who have lots of stock outside their retirement accounts."
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This assertion is provably false. 401(k) holders would receive the benefits from a repeal of the dividend tax, likely more than most. The dividends paid from investments into 401(k) plans, IRA's, and pension plans are all taxed before the plans receive them. These dividends are tax-deferred as income, but the dividend tax has already been paid. For example, General Electric will pay $0.19/share on its next quarterly dividend. All holders of record, including all pension plans, 401(k)'s and retirement accounts will receive the same $0.19 for each share owned. For each share, irrespective of who receives the dividend, General Electric will pay an estimated tax of $0.07. The General Electric Savings and Security Program told me that my GE S&S 401(k) account will receive the same $0.19/share as all other holders of common stock. 401(k) plans have neither shelter nor deferral from the dividend tax.

Because 401(k)'s and other pension and retirement accounts benefit from compounding returns, participants in these plans will benefit more, not less, from repeal of the dividend tax than other dividend recipients. If corporations choose to use their increased assets from the dividend tax repeal for expansion or for R&D, the 401(k) holders will still benefit from increase in the market value of held shares.

At least five columnists (see list appended) and hundreds of newspapers have repeated this false claim that 401(k) holders will not benefit from Bush's proposed repeal of the dividend tax. It must have been important to them to spread this misinformation. It is probably equally important to correct it.
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21-Jan-2003, updated 26-Jan-2003
A COLLECTION OF LINKS TO SITES THAT HAVE PUBLISHED THE 401(K)/DIVIDEND-TAX LIE
Chronological order
----------

"If you have stocks in a 401(k), your dividends are already tax-sheltered; this proposal gives big breaks only to people who have lots of stock outside their retirement accounts."
@B-New York Times
@D-07-Jan-2003
@T-An Irrelevant Proposal
@A-Krugman, Paul
@C-Column
@K-Economy; Dividends; Taxes; 401(k); Bush; Stimulus
@L-http://www.nytimes.com/2003/01/07/opinion/07KRUG.html
@G-08-Jan-2003
--------

"people who own stock through their 401(k)s, which is the way many middle class people own stock, don't pay income taxes on dividends anyway"
@B-New Republic
@D-07-Jan-2003
@T-INVESTOR CLASS ACT
@A-
@C-Commentary
@K-Economy; 401(k); Dividend tax; Bush
@L-http://www.thenewrepublic.com/etc.mhtml?pid=167
@G-15-Jan-2003
@O-At 4:30 pm (EST?), probably minutes after Bush finished his speech, this article was already able to quote Krugman's column about the speech.
--------

"However, much of these holdings are in 401(k) or other retirement accounts - and would not be affected by Bush's proposals, since such dividends are already sheltered from taxes."

"However, much of these holdings are in 401(k) or other retirement accounts - and would not be affected by Bush’s proposals, since such dividends are already sheltered from taxes."

@B-MSNBC News
@D-07-Jan-2003
@T-Bush UnveilsStimulus Package
@A-
@C-News
@K-Economy; 401(k); Dividend tax; Bush
@L-http://www.msnbc.com/news/854805.asp?cp1=1
@G-15-Jan-2003
@O-Same as ABC News Site, 7 Jan 2003.
--------

"The vast majority of American stockholders have their money in 401(k) accounts that are already sheltered. The tax cut is a break for wealthy investors with a clever advertising slogan attached: economic stimulus."

"About $4 trillion is held in 401(k) retirement plans and IRAs - money that would not benefit from a dividend tax cut because retirees pay regular income taxes on all distributions."

"The money in your 401(K) from both savings and dividends are tax-sheltered until you withdraw the money "

"Indeed, at the end of 2001 nearly two-thirds of U.S. investors' stock- and hybrid-fund assets were held in tax-deferred retirement accounts like 401(k)s and individual retirement accounts, or IRAs, according to the latest data from fund-industry trade group the Investment Company Institute. Current income is reinvested tax-free in these accounts already."

@B-Wall Street Journal
@D-08-Jan-2003
@T-Dividend Tax Cut Won't Offer Much Boost for Fund Investors
@A-McDonald, Ian
@C-Commentary
@K-Economy; Dividends; Taxes; 401(k); Bush
@L-http://online.wsj.com/article/0,,SB1041953394353481464,00.html
@G-13-Jan-2003
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"You got stock?" "Yes." "In a 401(k)?" "Yes." "So your dividends are not taxed now."

"Moreover, it would not affect the mass of dividends that go into the 401(k) plans on which most working Americans depend for additional retirement income. Those dividends are not immediately taxed now, and the taxes due when the money is withdrawn would remain unchanged under the Bush proposal."

"But not all of them will gain if the tax on cash dividends, currently the same as on ordinary income, is eliminated. Dividend taxes, for instance, don't apply to payouts on holdings in a retirement account such as a 401(k) or IRA."

"And then there's the little matter of your IRA and your 401(k). A big advantage to such accounts is that dividends grow tax-deferred. If dividends are deemed tax-free, then that advantage is eliminated."

@B-CNN
@D-13-Jan-2003
@T-What to do about the dividend tax cut
@A-
@C-Analysis
@K-Economy; 401(k); Dividend tax; Bush
@L-http://money.cnn.com/2003/01/10/retirement/q_planning/
@G-21-Jan-2003 1937 UTC
"And then there's the little matter of your IRA and your 401(k). A big advantage to such accounts is that dividends grow tax-deferred. If dividends are deemed tax-free, then that advantage is eliminated."
--------

"Second, much of this stock is held in tax-deferred accounts like 401(k) plans, IRA's, and Keoughs. This means that more than half of dividends paid already escape immediate taxation. But if the tax treatment of dividends is changed, portfolio allocations could also change, and a complete analysis has to examine the impact of such adjustments."

@B-New York Times
@D-16-Jan-2003
@T-Bush's Plan to Eliminate Taxes on Stock Dividends
@A-Varian, Hal R.
@C-Article
@K-Economy; 401(k); Dividend tax; Bush
@L-http://www.nytimes.com/2003/01/16/business/16SCEN.html
@G-21-Jan-2003 0729 UTC
--------

"A proposed tax cut on dividend income has stirred controversy about 401(k) plans, which wouldn't benefit because retirement plan withdrawals are subject to federal income tax"

@B-USA Today
@D-17-Jan-2003
@T-5 reasons to fill 401(k) nest
@A-Dugas, Christine
@C-Analysis
@K-Economy; 401(k); Dividend tax; Bush
@L-http://www.usatoday.com/money/perfi/retirement/2003-01-16-mym_x.htm
@G-21-Jan-2003 1949 UTC
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"Q: What about my investments in 401(k) and other retirement plans?"
"A: They would not be affected. You would have to pay taxes on the money -- even if it is a tax-free dividend -- when it is taken out."

@B-Associated Press
@D-19-Jan-2003
@T-Understanding Bush's Tax Proposal
@A-
@C-FAQ
@K-Economy; 401(k); Dividend tax; Bush
@L-http://www.nytimes.com/aponline/national/AP-Deciphering-the-Dividend-QA.html
@G-20-Jan-2003 1540 UTC
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- Andrew Hadley

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