Turning slogans into tax policy.

(69) See Steven A. Bank, Is Double Taxation a Scapegoat for Declining Dividends? Evidence from History, 56 TAX L. REV. 463, 465 (2003) ("Many observers blame the double taxation of corporate income for the disappearance of dividends.") There is, however, "no simple answer" to the question whether the double tax discourages distributions because the results depend on the relationship between corporate, individual, and capital gains tax rates as well as on nontax reasons for retaining or distributing earnings. WARREN, supra note 65, at 33.

(70) See Eugene F. Fama & Kenneth R. French, Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?, 60 J. FIN.ECON. 3, 4, 7 (2001). Part of the decline in dividend payments may be attributable to the increased use of stock repurchases, although the latter are not perfect substitutes for ordinary dividends. See Bank, supra note 69, at 464-65; Bratton, supra note 51, at 846.

(71) See Bratton, supra note 51, at 847 ("But, in practice, tax considerations influence payouts only marginally. Managers making payout choices do not try to minimize shareholder income taxes.").

(72) JOINT ECON. COMM., 108TH CONG., DIVIDEND TAX RELIEF AND CAPPED EXCLUSIONS 1 (2003); see also ECONOMIC REPORT OF THE PRESIDENT 204 (2003) ("Dividend payments may also be one way for shareholders to impose discipline on corporate managers: reducing the amount of cash at the discretion of management may focus management's attention on the most productive investments rather than on purchases that may not increase shareholder value.").

(73) See Jennifer Arlen & Deborah M. Weiss, A Political Theory of Corporate Taxation, 105 YALE L.J. 325, 350-51 (1995); Bratton, supra note 51, at 875 (noting that stock options "giv[e] managers a strong incentive to prefer repurchases").

(74) See Steven A. Bank, Dividends and Tax Policy in the Long Run, 2007 U. ILL. L. REV. 533, 574 ("[I]t might make more sense to rethink whether increased dividends specifically, and corporate governance benefits more broadly, should be the goal at all when it comes to the Tax Code.").

(75) Bush, supra note 49, at 110 ("It's fair to tax a company's profits. It is not fair to again tax the shareholder on the same profits. ... I ask you to end the unfair double taxation of dividends."); White House, Office of the Press Secretary, Background Briefing on the Growth and Jobs Plan (Jan. 7, 2003), available at http://www.whitehouse.gov/news/releases/2003/01/print/20030107-3.html ("If it's wrong to have double taxation, it's wrong to [have] any level of double taxation, whether it's 50 percent or 100 percent."); White House, Office of the Press Secretary, supra note 49 ("Double taxation is wrong--and it falls hardest on seniors.").

(76) George W. Bush, Remarks to the Economic Club of Chicago in Chicago, Illinois, 39 WEEKLY COMP. PRES. DOCS. 33, 36 (Jan. 7, 2003) ("First, the IRS taxes a company on its profit. Then it taxes the investors who receive the profits as dividends. The result of this double taxation is that for all the profit a company earns, shareholders who receive dividends keep as little at 40 cents on the dollar."); cf. Gale & Orszag, supra note 52, at 416 ("In fact, however, most corporate income is not taxed twice. ... "); Alan J. Auerbach, Who Bears the Corporate Tax? A Review of What We Know 25 (Nat'1 Bureau of Econ. Research, Working Paper No. 11686, 2005) ("[H]aving two levels of tax on corporate-source income doesn't necessarily imply double taxation of that income, in the sense of a cascade of corporate and individual rates.").

(77) See Auerbach, supra note 76, at 25 ("[Some investors] face marginal tax rates on corporate-source income that are little higher or even lower than their tax rates on ordinary income.").

(78) Although amounts withdrawn from a traditional 401(k) are fully taxable, the investment earnings are effectively exempt from tax since, assuming constant tax rates, the tax saving on the deductible contribution equals the present value of the tax liability on withdrawal. See 1992 INTEGRATION STUDY, supra note 49, at 25 (noting that, under dividend exclusion proposal, disincentive for investing pension funds in corporate stock would be "no greater than under current law").

(79) See Bush, supra note 76, at 36 ("[W]e have an obligation to make sure ... that American investors are treated fairly. We can begin by treating investors fairly and equally in our tax laws.").

(80) See Arlen & Weiss, supra note 73, at 326 n.2 ("[U]nlike vertical inequities, horizontal inequities are often arbitraged away by the market price mechanism."); Esenwein & Gravelle, supra note 52, at 5.

(81) See Gravelle, supra note 51, at 655.

(82) See Gale & Orszag, supra note 55, at 1166-68; Katherine Pratt, Deficits and the Dividend Tax Cut: Tax Policy as the Handmaiden of Budget Policy, 41 GA.L.REV. 503. 575 n.457 (2007).

(83) See 1992 INTERGRATION STUDY, supra note 49, at 13. The Administration was apparently unconcerned about any potential unfairness to shareholders who face marginal rates lower than the corporate tax rate. See id. at 22 (dismissing concerns about low-income shareholders).

(84) See WARREN, supra note 65, at 49 (rejecting dividend exclusion approach "because it would preclude the application of graduated rates to individual investors").

(85) See White House, Office of the Press Secretary, supra note 75 (agreeing that some Democrats who criticized the Administration's proposal on distributional grounds were "engag[ed] in class warfare").

(86) See Bush, supra note 76, at 36 ("Double taxation is wrong. Double taxation falls especially hard on retired people. About half of all dividend income goes to America's seniors, and they often rely on those checks for a steady source of income in their retirement."); White House, Office of the Press Secretary, supra note 49 ("Almost half of all savings from the dividend exclusion under the President's plan would go to taxpayers 65 and older. The average tax savings for the 9.8 million seniors receiving dividends would be $936.").

(87) See Esenwein & Gravelle, supra note 52, at 8-9 ("[I]n 2000, only 21 percent of individuals aged 65 or older actually received dividend income."). Since far more low-and middle-income elderly rely on interest income than on dividends, the Administration could have provided more effective broad-based tax relief for this group--if that was its goal--through a modest--interest exclusion. See id.

(88) See Bank, supra note 69, at 466 (referring to notion that double taxation causes retained earnings to be trapped in corporation as a "myth"). Historically, double taxation may be viewed as "the result of the retained earnings problem rather than its cause." Id. at 532.

(89) See H.R. REP. NO. 108-94, at 31 (2003) (arguing that dividend tax discourages dividends "even if the shareholder might have an alternative use for the funds that could offer a higher rate of return than that earned on the retained earnings").

(90) See White House, Office of the Press Secretary, supra note 49 ("More than 40 percent of people who receive dividends make under $50,000 per year--and three-fourths make less than $100,000 per year.").

(91) See Bruce Bartlett, Bush's Tax Cuts for Investors Will Boost Market, WALL ST. J., Aug. 26, 2002, at A10 (referring to "investor class"); Henry M. Paulson, Jr., Good For All Americans, WALL ST. J., Mar. 19, 2003, at A14 (arguing that repeal of dividend tax "will not only place more money in taxpayers' pockets but immediately result in higher equity prices").

(92) See WARREN, supra note 65, at 37 (noting that a reduction in dividend taxes may "be associated with an increase in dividends under the traditional, but not the new, view of corporate finance").

(93) See Alan J. Auerbach & Kevin A. Hassett, On the Marginal Source of Investment Funds, 87 J. Pub. Econ. 205, 216 (2003) (noting new view's "prediction that the level of dividend taxes has no impact on the incentive to invest or pay dividends").

(94) The proposal was essentially a warmed-over version of a corporate integration plan developed by the Treasury Department under President George H.W. Bush. See 1992 INTEGRATIONS STUDY, supra note 49; FY 2004 REVENUE PROPOSALS, supra note 49.

(95) See Steven A. Bank, A Capital Lock-In Theory of the Corporate Income Tax, 94 GEO. L.J. 889, 942 (2006); see also Arlen & Weiss, supra note 73, at 326-27 (noting that prior attempts at corporate integration have "died a quiet death").

(96) See Allison Stevens & Andrew Taylor, What Led to the GOP Leadership Rift, CQ WEEKLY, Apr. 19, 2003, at 933.

(97) The bill reported by the Finance Committee provided for an exclusion limited to the greater of $500 or 10% of qualified dividend income (rising to 20% in 2008). See S. 1054, 108th Cong. (2003). After offsets, the net revenue cost of the bill was $350 billion. See Stevens & Taylor, supra note 96.

(98) See Patti Mohr & Warren Rojas, House and Senate Offer Different Paths to Dividend Reductions, 99 TAX NOTES 591 (May 5, 2003) (discussing concerns about the structure and effects of the Administration proposal); Jonathan Weisman, Thomas Questions Dividend Tax Cuts, WASH. POST, Jan. 28, 2003, at A4 (noting concerns about the potential impact of the Administration proposal on investor behavior and corporate management).

(99) See H. REP. No. 108-94 (2003).

(100) See 149 CONG. REC. S6433 (daily ed. May 15, 2003) (remarks of Sen. Nickles); id. ("[I]t is what the President wants.").