The following is from “Marking the 4th Anniversary of the 2003 Tax Relief Law: A Boon to
Taxpayers, Tax Receipts, and the Economy,” issued by the Senate Republican Policy Committee (PDF stored at BizzyBlog host is here). Though it will clearly be seen as “partisan” by many, it has the advantage of being demonstrably correct.
The overlooked benefit mentioned in this post’s title is the more frequent redeployment of capital caused by the reduction of taxes on dividends received:
The success of the 2003 rate reductions are also evidenced by the resulting reforms and improvement in economic efficiency in the corporate sector. Historically, the tax law created a bias that prompted corporations to reinvest their earnings in new equipment or the development of new products or services, even when such actions might not complement the core competency of the business. To the extent that such reinvestments led to higher stock prices, shareholders would realize capital gains, which were taxed at a 20-percent rate prior to the 2003 tax cuts. In contrast, companies that distributed their earnings as dividends left shareholders with ordinary income, which was taxed at as much as 38.6 percent prior to 2003.
By equalizing the dividend and capital-gain rates, the 2003 tax cuts largely eliminated that bias. Consequently, managers now have an incentive to invest only in the best capital projects available to their company – new equipment and/or development of products or services that are consistent with the business’ expertise and that produce superior returns. And, the unneeded earnings can be distributed to the shareholders, who now pay the same 15-percent tax on dividends as they do on capital gains. The result is a more efficient use of reinvested earnings to provide capital for corporate growth and expansion.
It’s essentially “use it (wisely) or lose it (pay it out to shareholders)” for corporate managers now, who are expected to pay out funds that would otherwise be inefficiently used to shareholders as dividends. Shareholders can then find better uses for the money.
Those who are concerned the concentration of power in ever-bigger corporations should applaud the dividend tax cuts, because they work to put pressure on companies not to get bigger unless it really makes business sense.
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UPDATE: The above redeployment is over and above the more obvious money-shifting that occurs becaause of the reduction in taxes on capital gains. We know that investors have been selling more often. Why? Because capital-gains tax collections are up substantially, even though the tax rate went down; a lot more sales had to take place for that to happen. Investors doing so usually redeploy that capital elsewhere to opportunities they believe are better.