July 29,2009/3

David Leonhardt, consistently the most even-toned of big-media economics writers, explores in today's NYT the thorny issue of taxing health-care benefits, the only way any possible universal plan can come within an ace of being funded. For some time, looking at the seemingly intractable health-care situation, and working only with common sense, I've wondered whether it might make sense to offset some of the pain at the corporate level, whether inflicted on the employer or the employee, by making dividend payments deductible for corporate tax purposes.
I don't know how the sums work out vis-a-vis projected health-care arithmetic, but there are many other good reasons for doing this. It has long been clear that retained profits are too valuable to be entrusted to management. Eliminating the tax on dividends at the source would encourage distribution across a broad range of equities that are now valued entirely on the basis of per-share earnings prospects that may never be monetized for the benefit of stockholders. This would have to be good for the economy - putting money in the hands of people and institutions that can use it now - and for the equity markets. My corporate-finance mentors at Leman Brothers, mainly the late, great Harold J. Szold, taught that when corporations require equity for capital projects, they should get it afresh from stockholders via underwritten rights offerings, which have all but vanished from present-day finance. A return of this practice would be good for Wall Street. There is something about a recurring, rising dividend that would not only posthumously warm the hearts of Graham & Dodd, but is more solid than the hit-or-miss, now-and-then stock buyback programs that have replaced dividends in corporate favor. And there is this: anything that favors equity financing, or lightens its capital-structure burden, may slow the headlong rush to borrowed-money leverage that has already cost us so dearly.