Your editorial "America the Difficult" (Nov. 28) rightly takes up "America's uncompetitive system for taxing businesses." Everybody knows that an important part of this unsolved problem is the double taxation of corporate dividends. This was partially addressed by tax reform under President George W. Bush by reducing the personal tax on qualified dividends to 15%. But dividends are still taxed twice: The corporation first pays a 35% federal income tax on them and then the recipient of the dividend pays again.
Give corporations a tax deduction for all dividends they pay in cash and tax the recipients of the dividends at whatever ordinary tax rates they pay, not at a favored rate. The dividends would then be taxed once, not twice. Dividends on equity would be treated exactly the same as interest on debt. Another important advantage is that this would reduce the incentive for corporations to expand their leverage. This would make for sounder balance sheets on average and remove a significant part of the way the tax code promotes running up debt. It would increase the tendency of corporations to pay dividends which go to all shareholders, instead of doing stock buybacks which give the cash only to selling shareholders. Stock buybacks make companies try to time the market in their own stock-a dubious effort in which their overall record is far from successful.
This fix to the fundamental structure of business taxation should be made forthwith.
Alex Pollock is a resident fellow at AEI