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The President’s Jobs and Growth Plan: Improving Corporate Governance

In addition to creating jobs, the President’s proposal to eliminate the double taxation on corporate income will discourage corporations from sheltering income from tax and encourage good corporate governance.

Profits are an Opinion, Cash is a Fact

An investor’s maxim says that, “Profits are an opinion, cash is a fact.” Dividends send a concrete signal to investors of a company’s financial health and the credibility of its earnings claims.

The dividend exclusion will encourage companies to pay dividends, so investors can have more confidence in the financial health of the companies they own.

Less Incentive to Manipulate Balance Sheets

In an effort to make themselves appear to have more equity, companies have adopted widespread use of hybrid securities that appear on the balance sheet as equity, but whose payments qualify as tax-deductible interest payments for the company.

The President’s plan reduces the tax incentive to engage in these practices because it reduces the tax advantage of paying interest instead of paying dividends. The incentive for companies to engage in creative financial engineering is reduced.

Reducing Incentives for Corporate “Inversions” and Relocations

In recent years, concerns have been raised that U.S. corporations are moving their headquarters to lower-tax countries in an effort to reduce their overall tax liability.

By eliminating the double tax on corporate income, the President’s plan reduces the incentive for U.S. companies to move overseas.

Fewer Bankruptcies

Corporations with lower levels of debt are better positioned to survive economic downturns.

The Council of Economic Advisers predicts eliminating the double taxation of corporate earnings will result in a decrease in corporate debt relative to equity, thereby reducing capital market risks and instability.

Greater Transparency for Shareholders

Under current law, it is often difficult for shareholders to determine the amount of tax a corporation actually pays. This uncertainty, in turn, makes it more difficult for shareholders to evaluate the validity of earnings claims.

Under the President’s plan, corporate reporting will become more transparent since shareholders generally will be able to determine a company’s tax liability from their excludable dividends or basis adjustment reported on their form 1099.

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