[Editorial]

Cutting Back Gov't Control and the Dividend Tax

Sean Kerr

Since the depression there have been some lingering issues and certainly some illogical thought processes. One of these issues that have recently come to the fore is the double taxation on dividends. This was originally passed as a disincentive for companies to pay dividends because there was a desperate need to retain cash at the time. Simply put, dividends are monies left over that a company finds more worthy a benefit giving to the shareholders, as opposed to acquiring more assets, or leaving it in the bank. In its own effort to avoid a shortage-of-cash crisis, the government imposed a tax to be levied against the individual shareholders as well as the corporations. Unfortunately, it has stayed in place for too long. Why? Probably because it is—let's face it—a good source of revenue for the government.

Economics is about cause-and-effect relationships. Dividends are taxed at the corporate level at about 35 percent, and currently to individuals at about 25 percent. The chance for an effective business to return money back to its stockholders at 40 cents to the dollar has caused them to hoard cash and to find ways to increase their stock value by inflating earnings.

More importantly, the move to get rid of the tax on the individual side of the spectrum, will now put some responsibility back into the hands of the businesses to make a sound decision of what to do with their retained earnings. This, if more dividends are offered, which I believe is the reasoning behind this move, will allow investors to have something tangible to base their investment decisions on. With so many nervous investors and distrust in crooked executives, something like a tax cut on dividends, which in turn shows a company is actually making money, is necessary. Companies that pay out dividends have a decreased amount of risk in a falling stock price. For example, let's say a company with a stock price of $20 has a 4 percent dividend yield. This means that it pays an 80-cent dividend annually per share. Let's say its stock price drops to $10, now it has an 8 percent yield. It still pays those 80 cents per share only now it costs $10 to get it.

Let's talk about the problems. We live in a place that condemns the art of an efficient, productive business, thus the antitrust laws. We live in a place that puts no faith in the rationality of human beings, where a tax must be put in place to guide already efficient businesses what to do with their extra cash. We live in a place where economic strategies are only used to mask a political agenda. We are to believe that if this plan actually works that George Bush and his team actually saved our struggling economy. We live in a place where a move such as this is likely to be seen as a political play for power. Why? Because there is no rational philosophy that stands in place support it. With outmoded economic regulations in place, such as antitrust laws, we should be expected to believe businesses have a playing field where they can run efficiently without additional government interference. The bottom line is that businesses are at the mercy of political agendas, which do nothing more than play off people's emotions, and cause a continuous need for new band-aids.