Double Taxation of Dividends Should End

Published February 1, 2007

There is no good reason for government to tax dividends twice, as it now does, and many reasons not to.

Companies need capital to finance a business. There are three sources for a company to raise capital: (1) issue stock, (2) borrow by issuing bonds, and (3) earnings. Finances for the start-up of a company and the company’s growth come primarily from proceeds from stock sales and sales of bonds.

Owning stock amounts to having voting rights and some control of the company. Most companies now pay zero or very low dividends on stock. The result is that shareholders pay little or no attention to how well the company is run. This lets top management pad their own pay with stock options, take bonuses (even when their company is going bankrupt!), and give themselves numerous perks (perhaps we should call them pork).

Because dividends are paid after operating results are in, and bond interest on debt is an operating expense, there is reluctance by management to pay much in dividends.

Rampant Security Fraud

The October 9, 2006 issue of Business Week reported 1,139 security fraud cases in 2005. More than 1,600 security fraud cases were active in 2006.

Eliot Spitzer, New York’s former attorney general and now governor, has been the most aggressive and successful in obtaining indictments, restitution, and jail time for such cases. Contrast his effort with that of federal judges and legislative branches of government–they have been too slow in doing their jobs.

This national scandal can be easily solved by Congress changing the tax law so that dividends on stocks are treated as expenses, and then eliminating double taxation. The benefits to individual taxpayers and to the government bottom line would be phenomenal.

Benefits from Reform

Let me illustrate this point:

1. Shareholders would buy stock because they would be rewarded with decent dividends of 5 to 10 percent, and not the usual 0 to 2 percent we see now.

2. Shareholders would become true owners and take pride in the company whose stock they own. With a feeling of loyalty to the company, shareholders would be motivated to become knowledgeable about its management. Shareholder involvement would help weed out executives who are there only to promote policies that unduly enrich themselves.

3. Employees of the company would notice that shareholders are getting attractive dividends on their investments and from their personal involvement in the company. Employees’ loyalties would shift from the sense of “they” (the impersonal company) to “we” (our company) and team effort. They, too, would become managers of their own company by owning stock in it.

This would make a seismic shift in business ethics by the company and its workers. Every worker would then make sure that not just top management, but workers at every level, perform their duties in the best interests of all.

4. Even though “corporate America” is eons ahead of businesses in Russia and many other countries, we have a case of the “tub running over.” Regulators at many levels are spending billions of tax dollars, corporate audit dollars, etc. to mop up instead of closing the first shut-off valve that allows problems to flow.

5. The best retirement and savings plan is to invest in America’s free and competitive businesses. We should do all we can to develop the American taxpayers’ (including company workers’) investment in these businesses.

America’s savings rate is extremely low. This is mainly because the average person has seen little in the way of reward in the form of significant levels of interest or dividends to encourage him to investigate investment in stocks and thus improve his savings plan.

6. A huge additional benefit is that companies will value loyal workers more than machinery. There will be fewer sudden layoffs of workers, fewer mergers, fewer buy-outs of competition, and a drop-off in problems from near-monopolies.

7. Tax evasion, especially at the top levels of management, could be controlled more effectively, and the IRS tax codes could be greatly minimized. Individuals would be able to prepare their own income tax returns again.

Robert. H. Albrecht ([email protected]) of suburban Chicago has spent most of his more than 90 years of life as a businessman, and he continues to take a keen interest in business and government policies that affect business.