A couple of weeks ago I was listening to a podcast on which I heard Horace Dedieu assert that countries tax dividends specifically in order to encourage firms to reinvest profits rather than pay them out to shareholders. I’m reasonably certain that’s false. Countries tax dividends because dividends are a form of income and countries tax income. Generally countries tax dividend income at a lower rate than wage or salary income because they’re trying to encourage firms to pay dividends and thereby encourage individuals to offer up capital to firms.
But it’s an intriguing idea and I got more intrigued after watching this video of Google’s latest iteration of computer-piloted car:
Now watching this, I have a lot more confidence that this is a totally awesome invention than I have that this is going to lead to a totally awesome return on investment for Google’s shareholders. And I have even less confidence that it was a totally awesome ex ante risk proposition. But Google as a firm is controlled by its founders and more guided by their quest for glory than by their quest to maximize shareholder value. And even if the meaningful financial returns to computer piloted cars wind up going to some other firm, the history books will reflect that it was Google that took this concept from crazy sounding dream to something that’s clearly possible to implement. Glory unto Google!
One way of looking at it is that keeping capital trapped inside the firm leads to waste. But another way of looking at it is that investors don’t really want to bear the risks involved in investing in real basic innovation. In an era of high taxes, AT&T used its monopoly profits to fund Bell Labs. In the modern era, they’d face much more pressure to return those profits as dividends. Google, for slightly idiosyncratic reasons, is willing to plow the cash its core search business throws off into pie-in-the-sky underatakings. Open source mobile operating system! Robot cars!