Doubly so if they eliminate taxation of corporate dividends. They always go after sudden changes to try and "reallocate capital" and always get unintentional consequences and often economic dislocations. Reagan introduced the "at risk" test for real estate deductions and a bunch of S&L were caught with loans on projects that people were in only for tax purposes and walked away from with the new regulation. We know what followed. Now they are hoping to revive the stock market (wrong intention when valuations are still high), but the result will be increased cost of borrowing by municipal and state agencies that have tax free debt issues and will need to issue more of the same at higher rates (money will be flowing from the muni tax heavens to the dividend tax heavens). If they want to make a change, simply make the dividends deductible by the corporations ( just as their interest on debt is), and maybe raise the marginal tax rate on corporate profits to equal the marginal rate on individuals (thus eliminating a bunch of "artificial single individual corporations created fro the sole purpose of reducing max tax rate from 39.6% to the 35%.). My guess is that making dividends expensed to corporation will have a double whamo. Companies will lose the incentive to buy back their stock (in essence paying stock holder tax free dividends under the current scheme), they will develop a better ratio of equities to debt ratio (since both interest and dividends will be deductible the same way, so the incentive to overleverage will be reduced) and if they adjust the tax rate as I suggest, this change will more or less be "revenue neutral", and will eliminate the "harping" about "double taxation". If they insist eliminating taxation on received dividends, they should take it easy, not a sudden change, so that capital markets can adjust to the new realities over time. The best approach would be over a period of 10 years increasing slowly the amount of tax free dividends, starting with maybe $1000/year, going to $2000, $5000, $10,000 and after ten years complete elimination.
I was quite surprised to hear Safire this morning suggesting that elimination of taxation on dividends will be "good for the economy". If anyone knows how to contact Safire by E-mail, I'd like to send him a short note.
Zeev
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