It is generally considered that the shareholder credit method stands the best change of enactment because it would provide the tax reduction at the individual, rather than the corporate, level. Since this method would give all the benefits to shareholders, it would present corporations with the problem of creating acceptable plans for sharing in the tax savings. Many who favor the shareholder credit method assume that it should be possible to "package" dividends in a way which would convince shareholders that the dividend gross-up was a part of the dividend, even though it took the form of a credit against the shareholder's tax liability. Given this premise, they assume that cash dividends could be reduced below the levels that would otherwise prevail, and total earnings retentions could be increased. If double taxation could be eliminated without a negative impact on existing capital formation provisions, this analysis might well be valid. However, it should be recognized that many corporations would find it impractical to reduce actual dividend payments. The most they could hope to achieve would be a deferral of dividend increases. Furthermore, it cannot be assumed that a corporation could recapture by other means the savings accruing to its shareholders in the form of higher constructive dividend payments. Some of the money would be spent and much of it would find its way into other investments. Nevertheless, if the corporation were given time to work out a sharing of the benefits of the elimination of double taxation with its shareholders, and if it did not have to pay a penalty in the form of trade-offs to obtain this tax reform, it could gradually improve its earnings retentions and step up its capital investment programs. Proper phase-in should help to make this possible. It should be recognized, however, that the "packaging" of dividends in the manner described above would be an exceedingly difficult task and that it is a problem which would not exist under the dividend deduction method. Another way for the corporation to share in the tax savings might be through dividend reinvetment plans allowing shareholders to purchase stock for cash as well as with dividends. These measures not only would provide investment capital directly but would build the equity base and support the raising of additional capital through debt offerings. There is no question that elimination of double taxation of dividends is a desirable objective. If it could be done in a way which would enhance the availability of investment capital in the corporate sector by improving corporate profitability and increasing the return from investments in equity securities, the business community would strongly support such a program. On the other hand, other forms of tax reduction such as increased capital recovery allowances, together with a permanent investment tax credit, or a reduction in the corporate income tax rate should have a more direct and measurable effect on corporate profitability and, if so, would be preferred if they are achievable. ACTION REQUIRED Enact legislation to eliminate double taxation of dividends to provide more equitable tratement of corporate shareholders. Give highest priorty to improved capital recovery allowances, together with a permanent investment tax credit, and a reduction in the corporate tax rate, both to increase productivity, real wages, and employment and to benefit corporate shareholders. Resist, under any circumstances, attempts to reduce tax incentives to capital formation now available to business as the price of obtaining elimination of double taxation of dividends. Maintain the momentum which proposals to eliminate double taxation of dividends have thus far achieved, recognizing that this form of tax reduction could be of significant benefit to the corporate sector. Study further the economic effect of elimination of double taxation of dividends, and related unresolved questions, to assure a net contribution to increased capital formation and reduced unemployment. Encourage the implementation of a properly structured program for elimination of the double taxation of dividends on a phased-in basis without the sacrifice of existing capital formation incentives or the overall objective of EXHIBIT A COMPARISON OF METHODS OF ELIMINATING DOUBLE TAXATION OF DIVIDENDS COMPARISON OF METHODS OF ELIMINATING DOUBLE TAXATION OF DIVIDENDS EXHIBIT C COMPARISON OF METHODS OF ELIMINATING DOUBLE TAXATION OF DIVIDENDS |