more tax games

[Christian Gregory]

>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.

But the only time tax considerations come into play on the corporate side is when figuring out the cost of stock and the cost of capital. And the cost of stock is largely an accounting fiction--it's the opportunity cost of stock for the shareholder, 
as figured by the company. By taking taxation out of the equation for the retain/distribute decision, the gov has changed the rules for figuring out WACC (it will encourage lower debt/equity ratios and lower WACC for accounting purposes), but practically speaking, this wouldn't seem to matter much. Corps will pay the same taxes whether they payout 100% of r/e or none. And the dividend decision is made on other grounds--can you imagine either Amazon's or Microsoft's dividend policy changing b/c of this?  

But I'm sure I'm missing something.

Christian