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President Bush has announced that he will introduce legislation
eliminating income tax on stock dividends. This is a bad idea,
for the following reasons:

1. It gives the tax exemption to the wrong entities.

If corporations are to be encouraged to pay dividends, make dividends
tax deductable to corporations. This would encourage corps in the
position to pay dividends more likely to do so, and encourage ones that
already do so to have both better cash positions (due to lower taxes)
and pay higher dividends.

Dividends are so low nowadays that the tax exemption isn't going to
dramatically help many individuals, particularly since so many people
own stock in tax-deferred devices like IRA's and 401-K's (more on this

Maybe giving the exemption to corporations is bad politics at the
moment, but if the "double taxation" of dividends is what is to be
addressed here, it makes the most sense to give corporations the tax

2. What about IRA's/401K's?

Currently, what you withdraw from a IRA/401K is taxed as ordinary
income, unless it is from a Roth, in which case it is tax-exempt. What
about dividends from a stock in a 401K? Is this going to be taxed as
ordinary income as well? In other words, it may now be advantageous to
own dividend-yielding stocks _outside_ of an IRA/401K if dividends
aren't taxed.

So, what do the tax pros think?

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