Bush's Dividend Plan Won't Yield Great Results

Investors anxiously awaiting the implementation of President Bush's seemingly generous economic stimulus plan will have a while to wait before they see any benefit.

The cornerstone of the Bush plan -- the elimination of the tax on stock dividends -- is also the most problematic and the least likely to go untampered with by Congress.

Ending the so-called "double taxation of dividends" has been the rallying cry of many on Wall Street, as well as the new Republican Congress. The argument goes that corporations make a profit and then get taxed on it. If the company chooses to distribute any excess profits to investors in the form of dividends, shareholders then have to pay owe ordinary income tax on the dividend payout. Opponents argue that the same pool of money is being taxed twice, and say that's unfair.

But the tax code has always taxed entities (a company, a person), rather than taxing wealth (a pool of money).

Bush's proposal to give individuals a free pass on dividends is supposed to serve as a two-pronged economic stimulus. First, it would put more money in investors' pockets, as they'll no longer have to pay the tax on any dividends they receive. That, in turn, would encourage investors to put more money into dividend-paying stocks and, eventually, all stocks.

Second, the elimination of tax on the individual level is predicted to prompt corporations to stop frittering away their profits on costly acquisitions, new equipment and the like and start "returning" their profits to shareholders. As more investors re-enter the equity market, the argument goes, volatility will subside, and the greater stability will enable companies to increase their spending on (presumably) the above-mentioned. And yes, more spending means -- in the long run -- more jobs.

Two Strikes

The problem with Bush's approach is it won't help the vast majority of investors nor is it the best news for corporate America.