One of the things I find most perplexing about the Bush plan to cut dividend taxes is that it's raised any ire at all. The only thing I can think of that enjoys as widespread support among economists as taxing dividends and capital gains the same, is that retroactive extension of copyright duration does nothing to promote creativity.
People have written so much wrongness about this that it makes my head hurt. It is really very simple -- taxing dividend income at a higher rate than capital gains means that companies will substitute from returning money to shareholders through dividends to returning money to shareholders through share buybacks. If you look at the data, this is what indeed happened, but economists do wonder why it took so long.
Eliminating this difference in taxes eliminates this distortion -- companies will do whatever is best for them and their shareholders. This will marginally improve the efficiency of the economy, which is non-consequential in the short term, but really valuable in the long term. It will provide no real fiscal stimulus, nor will it seriously erode any tax base -- it's kinda like remembering to shut the door to the refirgerator, or squeezing toothpaste from the bottom of the tube -- it's just good sense.
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