Should Tech Companies Pay Dividends?
from the misuse-of-fiscal-policy dept
It’s being reported widely that the Bush administration is planning on trying to stimulate the economy by removing income taxes on dividend payments. Many think that this could cause technology companies (which, historically, have stayed away from paying dividends) to open up their checkbooks. The economic theory from the administration seems to be that without the income tax component, more companies will be willing to pay larger dividends, passing more money into shareholders hands, which will then somehow boost the economy (which they apparently consider to be the equivalent of the stock market). It will also encourage more people to invest in the stock market – since they could (conceivably) get more money back in dividends. This seems to be fairly backwards thinking. As Kevin Werbach points out, the reason technology companies usually don’t pay dividends is they believe they can invest that money better than their shareholders. If we take a step back you can see why this is probably a bad idea. Economic growth comes from productivity increases, which are fueled by technology advances. When technology companies are encouraged to pay out dividends instead of investing it in new opportunities, we’re encouraging consumer spending over productivity enhancements. It seems like a short-term strategy that does little to help long-term economic growth.