Johnston: Taxes, Dividends, and Patriotism

David Cay Johnston has published Taxes, Dividends, and Patriotism, 121 Tax Notes 865 (Nov. 17, 2008):

There is a better way to solve our national financial crisis than Washington's borrowing bender. A better solution lies in tax policy. ...

[W]here do we get tons of money to stimulate the economy without borrowing? From corporate America. And how? We unlock retained earnings with tax law as the key. American corporations have enormous stores of retained earnings, more than $4 trillion. ...Microsoft has $23.6 billion in cash and liquid assets. Exxon Mobil has $33.9 billion. We need to give companies a powerful tax reason to start writing checks from what amount to corporate savings accounts. ...

My thoughts here are influenced by many economic papers, but particularly by a pioneering analysis in 2004 by NBER researchers Harry DeAngelo, Linda DeAngelo, and René Stulz. [Dividend Policy, Agency Costs, and Earned Equity] This trio of business professors asked, "Why Do Firms Pay Dividends?"  Their answer was that if they didn't, "their asset and capital structures would eventually become untenable as the earnings of successful firms outstrip their investment opportunities." ...

Tax policy offers tools to escape the event horizon of the black hole of public finance -- which is a liquidity trap that government would be helpless to free us from.

For starters, we could make dividends tax deductible for the next two years. That would encourage big payouts.

At the same time, we can persuade investors to demand payouts by setting a tax rate of zero for taxpayers with an adjusted gross income of less than $250,000 and just 10% for the 1 in 50 taxpayers who make more.