Kilroy Was Here
January 08, 2003
Some Reasons to Avoid Double Taxation of Dividends
Yesterday, I posted the question "What's wrong with Double Taxation?" After listening to Brad DeLong today on KQED's Forum in San Francisco, I got a great answer.

While I still agree that there's nothing inherently wrong with double taxation, Brad DeLong pointed out that there were real problems with double taxation of dividends.

In particular, taxation of dividends at both the corporate and the individual level tends to incent businesses to raise capital by issuing bonds rather than stocks. This increases a companies debt-to-equity ratio (which for many reasons in business is a "bad thing").

Interestingly enough, in a Wall Street Journal editorial on August 13, 2002, three professors of finance at leading insititutions believe that the best way to rectify this situation is not to abolish the individual tax but to grant dividends deductions from the corporate income tax.

"Some, including this newspaper's editorial board, have correctly identified tax policy as the source of this problem and called for both the deductibility of dividends at the corporate level and the abolition of dividend taxes at the personal level. But that proposal swings the pendulum too far in favor of dividends. Since interest payments to bondholders are treated as taxable income, exempting dividends from the income tax would give equity an unfair advantage. We believe that solely granting dividends deductibility from the corporate income tax, which puts debt and equity on completely equal footing, will achieve the same goals while costing the Treasury far less money."

So, now my question is why didn't the White House propose this?

Furthermore, as DeLong and others pointed out, this type of tax reform isn't really an economic stimulus. Wouldn't it be better to propose this type of reform with changes in the Alternative Minimum Tax system and other tax reforms? Or is this the only way politically viable way to get this through?

If I keep researching this, I may become a tax expert yet!

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