For Immediate Release
April 8, 2003
Eliminating the Dividend Tax to Strengthen the Economy
Hearing: Promoting Corporate Responsibility Through the Elimination of
Chairman Fitzgerald, Ranking Member Wyden, and distinguished
members of the Subcommittee, I am honored to testify before you in
support of the Presidents proposal to eliminate the double taxation of
This proposal would strengthen our economy and create jobs by
improving corporate governance and re-targeting investment to its most
productive ventures. Corporate governance would improve because the
proposal would better align executives interests with shareholders and
encourage companies to disclose more clearly their cash earnings and
taxes paid. Investment efficiency would rise because the proposal
would reduce tax distortions to fundamental corporate decisions such as
whether to repay shareholders or how much debt to raise.
The result would be more investment, higher productivity, more new
jobs and faster economic growth. At a time when too many people who
want jobs cant find them, and when economic growth around the world is
slower than we should accept, the Presidents proposal would be a
welcome shot in the arm.
In the past year, under Chairman Oxleys and Senator Sarbanes
leadership, Congress took a major step toward improving corporate
governance in America. Investors have matched that with their own call
for improved governance. Corporate executives, directors, auditors,
and lawyers are already hearing and heeding the call for greater
accountability. Better-run corporations make for more efficient
capital markets and a healthier economy.
But there is more to be done in encouraging the best conduct from
corporate executives. Think of the headlines of the past couple
years. Jobs destroyed by bankrupt firms that took on too much debt.
Executives that managed earnings, inflating their companies stock
prices and pumping up the value of their own stock options. Corporate
inversions where companies moved to tax havens abroad.
There are many forces responsible for these problems, but our tax
code shares some of the blame. By taxing dividends twice, our tax code
encourages companies to retain earnings instead of paying them to
shareholders; to raise excessive levels of debt; to repurchase shares,
often on a one-off basis, instead of issuing dividend checks; to
dedicate some of Americas leading minds to tax minimization instead of
job creation. Theres nothing wrong with debt or retained earnings or
share repurchases. But theres no reason our tax code should favor
Eliminating the double taxation of dividends would reduce these
biases against investing and creating jobs. A shareholder would no
longer pay a second layer of taxes on dividends if the corporation had
already paid tax on that income. If the company retained that income
and invested it again, the shareholder would get an equivalent credit.
This is a ripe moment to improve corporate governance by removing
the tax bias toward debt and retained earnings. CEOs and capital
markets are now acutely sensitive to the risks of managed earnings.
Yet today, because of double taxation, only half of non-financial firms
pay dividends. Without periodic dividends unmistakable facts about
cash flow investors are basically left with earnings opinions. As
Secretary Snow says, you can fudge earnings, but you cant fudge cash.
The Presidents proposal would clear the barriers to companies that
sought to mirror their earnings reports with dividend checks.
The Presidents proposal is bad news, too, for the attractiveness of
corporate tax shelters, corporate inversions, and other tax
minimization devices. The rationale for creating these devices would
lessen, because an investor could only claim an exclusion on a dollar
of dividends if the company had paid full tax on that dollar.
The proposals second benefit would be boosting investment
efficiency and thus job creation. Lets be clear where jobs come from.
New jobs come from investment the willingness of investors and
entrepreneurs to put capital at risk in a business venture. The
Presidents proposal is focused precisely on that point: at sharpening
the incentives for investors and entrepreneurs to invest in the most
productive ventures. And higher productivity means higher wages and a
stronger economy for everyone.
Taxing dividends twice means that we tax investment more heavily
than any other major industrial nation. If investment is the blood of
new jobs and growth, this is bad policy.
The double taxation of dividends also distorts companies decision
to retain funds versus returning capital to shareholders. Even if
shareholders have more promising investment opportunities elsewhere,
the tax code locks those funds up inside the company.
Thats not good for shareholders, and its certainly not good for the
Each year American firms invest over $1 trillion in fresh capital
and generate $700-800 billion in corporate profits. Think of the gains
in capital utilization and job creation for everyone if we accelerate
and re-target this entire investment process. The Council on Economic
Advisors estimates that through 2004 the dividend tax cut alone would
generate more than 400,000 new jobs, nearly a third of the total from
the Presidents Jobs and Growth Package. The Business Roundtable says
its even higher, closer to half.
Taxing dividends once and only once would convert directly into
higher share prices. Private sector economists estimate that the
Presidents proposal could boost stock prices by 5 to 15 percent,
delivering immediate wealth to a confidence-short market.
Last, some ask why the President has not proposed eliminating the
corporate income tax instead. The main reason is that doing so would
violate the Presidents principle that the government tax dividends once
and only once. If Congress eliminated corporate-level taxation, many
billions in profits, headed to tax-free entities or abroad, would
escape any taxation at all. Much more revenue would be foregone. And
the way would be kept open for the same kind of tax minimization
devices that todays tax code fosters and which the Presidents proposal
would cut back.
On behalf of the Administration, I urge you to take this
opportunity. Thank you.