TAXES: Bring Back Dividends.(Brief Article)

There is a silver lining to the hysteria with which Washington has greeted the recent corporate scandals: Politically, the new investor class is now triumphant. Everyone in Congress now at least professes to be the shareholder's friend. No one denigrates investors as the undeserving rich. Moreover, Congress is willing to enact legislation that it thinks will help protect shareholders from corrupt corporate managements.

It's time to put this friendship to the test -- by asking Congress if it is willing to protect shareholders from Washington, too. The federal tax code is heavily biased against investment and toward consumption. The overtaxation of corporate dividends is one of the worst manifestations of this bias. Individuals pay income tax on dividends even though those dividends come out of corporate income that has already been taxed. That's why dividend yields have been anemic in recent years.

This overtaxation encourages companies to rely on debt financing. It also leads them to retain earnings that would, if not for the taxes, be distributed directly to shareholders. This tendency, in turn, impairs the market's ability to discipline corporate managements. Investors who receive large dividends know that their companies' earnings are real, not the product of accounting ...