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The stock market may have more to celebrate than the pending victory in Iraq. The president's plan to cut tax rates, relegated to the back burner by the media in recent weeks, is nevertheless the biggest event to hit the U.S. economy and asset markets since the Reagan Plan in 1981. I was in Washington then as a member of the Reagan economic team, participated in the planning and marveled at its success. President Bush's proposed tax cuts rank with President Reagan's as a tonic to restore growth to the U.S. economy. I am talking about as much as 1,700 points on the Dow Industrials.
The most important part of the plan is ending the double taxing of dividend income. We may not realize it, but the U.S. has the highest taxes on capital in the industrialized world. By reducing the return on investment, these high taxes inhibit job-creating growth. Reduction or elimination of the double tax on dividends would work by raising the aftertax return on capital by nearly two-thirds for profitable, tax-paying companies. It would increase equity values by 10% initially, with the potential for another 10% to 20% as companies adapt to the new tax rates. We're talking here about the potential to put the Dow Industrials back over 10,000. The reform would add $1 trillion to net worth initially, with a further $2 trillion in subsequent years. And it would make capital available to companies to buy new tools and equipment to make their workers more productive.
The Real Deal On Dividends
The dividend tax cut is not about Wall Street; it is about Main Street. U.S. workers are the most productive in the world. They are productive because they have the best training and the most modern tools. The dividend tax cut will bring more tools to workers to create more high-paying jobs. Increased dividends will also exert powerful disciplines on company managers, which will help to restore proper governance to businesses and confidence among investors. How? By discouraging hoarding of profits and subsequently throwing the money away on overpriced acquisitions and excessive executive perks. Companies of all sizes have already begun to announce new dividend policies in anticipation of the tax cuts, from giant Microsoft (nasd: MSFT - news - people ) in January, to IHOP (nyse: IHP - news - people ) last week. What does it mean that Microsoft is finally paying a cash dividend? That its savvy management understands that, in the future, investors will no longer be satisfied with pie-in-the-sky but will want to see a real cash return on their investments. The revenue lost to the government is roughly $30 billion per year, though this will be substantially offset in the long run by increased tax revenue created by faster economic growth. In a $10 trillion+ economy, the lost revenue is a pittance. But the benefits of the tax cut will be enormous.
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