Loss of dividend tax would be a boon for investors

Advocates say move could boost stock market by 10 percent.

As President Bush announced his tax cut proposal Tuesday, Democrats zeroed in on the possibility of eliminating the dividend tax, arguing that it only benefits the rich. Meanwhile, some Ball State professors saw both the benefits and drawbacks of such a plan.

"In the short run, the dividend tax cut looks like a sop to the rich," said Cecil Bohanon, professor of economics. "But there is another side to the story."

Bohanon said the plan may help the economy.

"One could make a fair argument that if you give people money, they will go spend it," Bohanon said, "That stimulates the economy."

This is one argument finance and insurance professor Terry Zivney said may be valid.

"Philosophically, the tax cut is a good idea," Zivney said.

However, Bohanon found downsides to the plan. Because the middle class is more likely to actually spend the money, Bohanon argued the plan should be geared to benefit people of lower classes.

"The money has to be made up somewhere and at the end of the day, the lower end of the income scale has the higher burden," Bohanon said.

Though the proposed cut may not affect students directly, it will have an impact on investors, Bohanon said.

In the eyes of the state, corporations are treated as a collective legal person, Bohanon said.

"Each shareholder is also treated as a legal person. All persons have to pay taxes," Bohanon said.

Therefore, when government assesses a tax on a company's profits, the after-tax profits are returned to shareholders and taxed a second time. This tax is called the dividend tax. Zivney said dividend taxes help the government raise revenues.

Zivney said the dividend tax affects investors' behaviors because it may shy them away from buying stocks.

The elimination of this tax may make investing more appealing to shareholders because they will get more out of their investments. Bohanon said the dividend tax cut may benefit stock values if enacted.

"Getting rid of the dividend tax can make all stocks much more valuable," Bohanon said. "This can encourage more small companies to expand and grow."

Zivney said the economy may reap alternative benefits if the cut is enacted.

He said one reason taxes are in place is to raise money, and the other is to affect people's behaviors.

"If you reduce taxes in general, it reduces distorted behavior."

The change in behavior has been a factor on investors, and Zivney said it may affect the actions of companies.

"In the last several years in business there have been a lot of scandals," Zivney said.

Zivney added that the tax has helped increase investor confidence. When a company pays its dividends, Zivney said it shows that company made money. He added that although cutting taxes reduces distortion, it will not alleviate it.