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Cam, welcome to the discussion. I agree that it looks a little strange to maintain the top corporate rate at 40% while the income tax rate goes to 10% for 25% of the filers and zero for the other 96 million filers.

The corporate tax has long been a "double" tax: you are taxed first at the entity level, and then, to the extent the corporation generates excess profits and issues a dividend, again at the shareholder level. You bought, with your after-tax dollars, a share of stock in a corporation entitling you to share in the profits of the enterprise, but first you pay the government 40%, and then you pay the government again at the dividend tax rate.

If you eliminate or significantly reduce personal income tax rates on dividends, I would argue that the double taxation either goes away, or is largely alleviated. So the shareholder doesn't feel so aggreived about being soaked on his dividend or any capital gains that result.

The flat tax has implications for corporate governance, also. In the current environment most corporations don't issue dividends, they plow back excess profits as retained earnings and reinvest in the business. You're an investment banker, right? So you have probably run the model that shows the impact on equity value of distributing the dividend vs. retaining it and committing to a positve net present value project. With a tax on dividends, the corporation makes the decision FOR YOU-- the earnings yield on an internal project doesn't have to be as high for you to realize the equivalent return from appreciation of equity value as you would have gotten if the corporation dividended out the excess cash. Does that make sense? (I'm sincerely not sure it does?)

Anyway, consider the effect of a zero tax on dividends in empowering the shareholder to be more active in reviewing the actions of the board, and the activities of management. . . Joe shareholder says, if you can't find a way to increase EPS, then give me my damn money back and I'll go find somebody who will! Management wakes up and realizes that they had better come up with some positive NPV projects or they are going to find the well drying up real fast.

The common shareholder might just start paying attention if he thought he would be getting a check every three months. Might even vote his shares differently, and a shareholder who pays attention is a damn good thing to have in the post-Enron world.