March 28, 2003

The Honorable Olympia Snowe
United States Senate
Washington, DC 20510

Dear Senator Snowe:

I write both as the CEO of SEI Investments and as the chairman of the American Business Conference (ABC), a coalition of CEOs of midsize American companies. My purpose in writing is to share my views, and the views of my ABC colleagues, in regard to President Bush's proposal to eliminate the double-tax on corporate dividends. I assume this issue is of special interest to you both because of your longstanding commitment to prudent budget and fiscal policy and because of your recent assumption of the chair of the Senate Committee on Small Business and Entrepreneurship.

My interest in the President's dividend proposal is two-fold. I am an entrepreneur who started SEI as a two-person operation and built it into a publicly traded company with 1,000 employees in 21 offices in 10 countries. Today SEI administers over $250 billion in mutual fund and pooled assets, manages $77 billion in assets, and processes about $50 trillion of investment transactions annually.

At the same time, because of the very nature of SEI's businesses, I am in constant communication with American investors - individual and institutional -- who look to SEI to help them manage their savings. SEI's success has been a product of the revolution in American investment as more and more people either individually or through mutual funds, turn to our capital markets to help them secure their financial future.

Both from my perspective as an entrepreneur and as someone who well understands America's new investing class, I regard the President's dividend proposal as one of the most important tax reform proposals in three decades. I urge you to support it.

Why the Dividend Proposal is Important from an Entrepreneurial Perspective
SEI began with little more than a business model. We had no hard assets - no machines or buildings or other readily valued properties - against which we could borrow. Most entrepreneurial firms are like that. Many begin life fueled by an infusion of venture capital but then, sooner or later, they must turn to the equity markets for long-term financing. This is a transition as difficult as it is inevitable: banks don't accept ideas as collateral.

Even with the current difficulties observable in the IPO market, we're fortunate that in this country our equity markets are sufficiently broad and deep to allow this transition to occur. It is what has fueled economic growth, job creation, and technological innovation. Other nations, as I am sure you know, simply do not have the financial infrastructure or entrepreneurial "culture" to permit small growth companies easily to go public by tapping the equity markets.

At the same time, the way we currently tax corporate profits impedes financing by raising its cost. Because the corporate and individual income taxes are not integrated, equity capital is subject to multiple layers of taxation. That fact combined with the privileged tax treatment of corporate debt (interest payments are deductible at the corporate level) makes equity capital significantly more expensive than debt. For older, established companies, as countless commentators have noted, this means that selling bonds usually makes better sense than issuing stock. That distortion is bad enough. I would add one other that rarely is noted: the multiple tax burden on equity financing is especially inimical to small growth firms because they do not typically have the option of raising capital through leverage.

The President's proposal, in essence, would go a long way toward integrating the corporate and individual income taxes. It would do so by removing the double taxation of dividends and, for owners of stock in companies that do not pay dividends, offering some indirect capital gains tax relief.

There is no question here of anyone avoiding tax: if corporations do not pay the corporate income tax, the President's proposal would not apply to them or their investors. Instead, the President's proposal would equalize the incidence of the corporate income tax between debt and equity.

This would, at the margin, lower the cost of equity financing and bring that cost into balance with the cost of leverage. From a growth perspective, all businesses would benefit -- most particularly, from my point of view, those smaller growth companies that will someday become the next generation of American multinational corporations. Please note: whether or not such companies pay dividends in their early stages of development is irrelevant. Either way, the effect of the President's proposal would be to lower their average weighted cost of capital.

Why the Dividend Proposal is Important from an Investor Perspective
Investors, indeed all Americans, have an intense interest in furthering economic growth and job creation. Growth and the jobs that attend it benefit everyone and ultimately are the only source of true wealth creation. In my view, using this yardstick, the President's dividend proposal is by far the most important component of the Administration's entire growth package.

The accounting firm of PriceWaterhouseCoopers (PWC) agrees. In a study commissioned by the Business Roundtable, a group of CEOs of large American corporations, PWC, using the University of Maryland's Inforum LIFT macroeconomic model, found that the dividend proposal would increase job growth by an average of 500,000 per year over the next five years while boosting Gross Domestic Product (GDP) by more than one percent per year. At any time these findings would be highly significant; given the current state of the economy, they are commanding.

In addition, the abolition of the double tax on dividends would obviously result in higher equity prices. How much higher? If I could predict with precision the future course of equity prices, SEI would enjoy a 100% market share. Not being so prescient, I am content to rely on the estimate recently cited by Henry M. Paulson, Jr., chairman and CEO of the Goldman Sachs Group. In an op-ed in the March 19, 2003 Wall Street Journal, Mr.Paulson reckoned that the President's dividend proposal would result in a boost in equity prices on the order of 5% to 20%. That is obviously a wide range, but even if we assume the lower figure of 5%, that result would be most welcome in the current market, adding, by Paulson's calculation, $500 billion in wealth to the economy.

Beyond increasing equity prices, the removal of the double taxation of dividends obviously would benefit investors because more companies would have an incentive to pay dividends. Although I cannot predict how many companies would be so inclined, I have said, in an interview in Business Week, (January 27, 2003) that if the President's proposal were enacted, "to the extent that [SEI has] cash we don't have a use for, we [would] look harder at dividends than before."

Further, companies choosing not to pay dividends under the President's proposal would be faced with an even greater responsibility to explain to investors why the retention of earnings promises a greater return to shareholders than a dividend payout. This kind of transparency would, in my opinion, accomplish far more in terms of good corporate governance, clear financial disclosure, and investor protection than new top-down capital market regulation.

Conclusion I realize, of course, that these are difficult times for the federal budget. The cost of victory in Iraq will not be insignificant. That cost follows the single largest two-year jump in federal spending in a quarter of a century. So you and your colleagues have every right and indeed a positive responsibility to scrutinize with care all tax cut proposals and, in particular, new spending programs.

Along with my fellow members of the American Business Conference, I respectfully suggest that the President's dividend proposal deserves enactment. The economy needs it, both in the short and long term. What ails this economy is not a shortfall in consumption - it is insufficient capital formation, job creation, and investor confidence. These problems must be addressed, and the dividend proposal is in my view, given the benefits it will yield, a very good deal for business, especially entrepreneurial firms, for investors, and, indeed, for all Americans.

Very truly yours,

Alfred P. West Jr.

Home

Policy Statements

Press Releases

The American Business Conference is a Washington-based coalition of chief executives of fast-growing, midsize American companies. ABC members advocate tax, budget, trade, regulatory, and education reforms designed to promote economic growth and a higher standard of living for all Americans.

For more information about membership in American Business Conference or about our advocacy, contact Andre Thomas or email: abc@americanbusinessconference.org

American Business Conference
1828 L Street, NW, Suite 908
Washington, D.C 20036
202-822-9300
202-467-4070 Fax