A plan that won't pay dividends

New York Times: Bush Stimulus Proposal to Eliminate Taxes on Dividends

For the past year, there has been active discussion about "New Economy" companies like Microsoft and Cisco paying little or no dividends but give out huge amounts of stock options. With the collapse of the Internet stock bubble, there have been calls to treat options as expenses, and pressure from some institutional shareholders for these companies to institute dividends rather than sit on huge piles of cash.

The Bush administration has apparently decided to go after the dividend side of the equation. They seem to think that eliminating the tax will lead companies to pay out more in dividends, which will juice the stock market. Leaving aside the question of how "economic stimulus" is now defined as "higher stock prices", it’s hard to see how this would happen. New economy companies pay little in dividends because they believe they can make better use of the cash than their shareholders. Investors may be wrong in accepting this rationale, but cutting taxes for those investors won’t change the way the companies think.

The Bush economic team has as its reference points Old Economy companies like Alcoa and CSX, where its two Treasury Secretaries came from. They seem to think that if companies go back to that model, everything will be OK. It ain’t gonna happen. If the objective is to challenge the late-1990s financial model, the way to do it is to require expensing of stock options. Sure, double taxing of dividends is a distortion, but so is treating stock options as inhernetly valueless when granted.

Maybe expensing options isn’t the right approach. There are good arguments against it. The real question is whether we take the opportunity created by Enron, Worldcom, and other financial scandals to take a stand against financial chicanery. Instead, we have an administration trying to turn dishonesty about its economic policies into an art form. All the emphasis is on political calculations and how to "sell" policies, rather than on the underlying economics.