Today's Wall Street Journal mentioned an important aspect of Bush's proposal that we had previously not heard of, but we have verified that it will be part of his plan. It changes the kinds of stocks that would benefit in a major way.
In addition to excluding dividends from individual taxation, Bush will propose allowing companies to treat retained earnings essentially as "reinvested dividends." Shareholders would increase their basis in the company's stock by the amount of retained earnings. This means that shareholders would pay tax only on capital gains due to multiple expansion; capital gains due to retained earnings would not be taxed. The point of this is to keep tax considerations out of corporations' decisions on whether to pay out or retain earnings.
If enacted, this would alter what kinds of stocks benefit from the proposal. Dividend-paying companies and those companies in a position to start paying dividends would no longer be exclusive beneficiaries; the after-tax return of stocks of companies that retain all of their earnings would also rise. In fact, this provision would result in taxing stocks that have multiple-expansion potential relatively more than others. This result and the complexity of the proposal suggest to us that further changes could be made. But it is intended to deal with complaints of companies that prefer to retain earnings rather than pay dividends. So while the details may change, it does seem that the direction of the President's proposal will be to benefit stocks more broadly than just those that are paying or may pay dividends.