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Capricious Congress

Tax policy is not a constant factor investors can include in their calculations. The 1980's have seen dramatic shifts in the tax system. Each change has shifted the marginal rewards of various investment strategies and has thereby engendered a redeployment of assets into those instruments with the greatest after-tax yield. One of the largest items on the policy-making agenda at this writing is changes, probably in the tax system, to come to terms with the ``takeover binge''. This can take many forms; two obvious approaches are foremost. If anti-takeover legislation attempts to limit the deductibility of interest on debt issued to finance acquisitions, there will be little impact on the issue of earnings allocation by a New Technological Corporation. If, however, the disparity between return of corporate earnings to shareholders and bondholders is addressed by measures that eliminate or substantially reduce the double taxation of dividends, the disincentives to dividend payments will be removed and the market will, in all probability, assign a greater value to dividends which will be reflected in appreciation of stocks which pay dividends.

It behooves the management of a New Technological Corporation whose secure earnings could easily sustain substantial dividend payments to monitor changes in policy which affect the economic incentives governing dividends and adjust the strategy of their companies accordingly.

Editor: John Walker