A Corporate Tax Break For Paying Dividends (MSFT)(GOOG)(AMD)(BSX)

The government is fond of using taxes and tax benefits to change behavior. Put a big tax on cigarettes and people will smoke less. Put a "gas guzzler" tax on big cars and people will drive Minis. Academics have probably made careers arguing whether any of this works.

One of the pieces of information that floated into the market in the last couple of days is that big companies are sitting on an unprecedented amount of cash. The New York Times reports that "according to S.& P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998."

Paulson and his friends in Congress are fighting over a $152 billion economic stimulation package. It would get most Americans $600 or so this year, about enough to buy gasoline for a week at $4 a gallon. The government should come up with some incentive to get big business to spread around some of that $600 billion.

Many companies will use their cash to buy other companies. With the stock market down, valuations are probably as good as they will be this decade. The market can watch more synergy like the train wrecks of the Boston Scientific (BSX) purchase of Guidant and the AMD (AMD) buyout of graphics chip company ATI. Between those two companies about $20 billion of market cap was destroyed. Nice work, if you can find it.

The Feds could go to corporate America and offer a tax incentive of $.50 for every dollars that large companies give out in dividends. Google could probably pick up a $5 billion benefit. Microsoft (MSFT) might drop its unpopular bid for Yahoo! (YHOO) and get a $10 billion cut in its taxes for sending most of its cash to shareholders. Microsoft paid a special dividend before and it was very popular with shareholders, especially Bill Gates.

The government has a chance to tap a massive pool of capital without it coming directly from the US government. Down the road, tax receipts from big companies will fall if they get a credit. But the economy needs the money now, not in a year or two.

Douglas A. McIntyre