It is long since time for the ill-advised dividend tax to go.

A short history lesson provides a haunting perspective.

Enacted in 1936, the double taxation of corporate earnings was a concession by the "New Deal" administration. The government was actually trying to achieve the social good of releasing corporate cash that provided a security blanket for corporate executives; however, it also needed to raise revenue. Terrified by the potential pressure from shareholders that would follow if cash were taxed at the corporate level and savvy to the government's financial pressures, company executives lobbied on behalf of themselves, not their shareholders (sound familiar?). They won. Executives were not only allowed to keep their security blankets with impunity, but dividends would actually be taxed for the first time, providing even more motivation to hoard cash.

As long as Congress continues to support corporate tax incentives that misalign the interests of executives from their shareholders, the outrage and sermonizing from many of its members about downfalls in contemporary corporate governance rings hypocritical. With dividend corporate earnings taxed twice -- once at the corporate level and then again at the shareholder level for a total tax rate of around 60% or more -- executives have profound incentives to do other things with the money, which, in many cases conflict with the interests of those they have a fiduciary responsibility to represent:

  • They may hoard cash rather than return it to shareholders, earning a lower return than shareholders rightly would expect to generate if they controlled the money themselves;

  • Under pressure to deploy excess cash, executives may invest the money in areas outside their competency or capacity, exposing investors to unnecessary risk;

  • Faced with the need to raise capital, they may choose debt instead of equity, exposing shareholders to unnecessary risk;

  • Companies may pay their executives excessively, which takes money out of the pockets of shareholders;

  • Executives may choose to reward their stockholders through stock buybacks. This is great in theory, but in practice these buybacks are often used to cover the dilutive effects of executive stock compensation; and

  • Without dividends, shareholders must look to share-price appreciation alone for their returns. This puts a lot of pressure on executives to meet and exceed earnings expectations, which can be accomplished through the legal but often misleading application of accounting principles.

While these examples of abuse may not result purely from the excessive taxation of dividend corporate earnings, Congress is acting as an accomplice for these behaviors, and that is simply wrong.

Interestingly, there was strong bipartisan support for the somewhat ambiguous Sarbanes-Oxley bill, which carried the Senate 97-0 -- a rare event, indeed -- and attempted to broadly resolve corporate governance issues. However, when it comes to a specific major impediment to sound corporate governance for which Congress itself is responsible, many of our representatives simply seem to lack the courage of their convictions necessary to take specific actions that lead to real results.

The economic stimulus that will result from eliminating the dividend tax transcends the immediate tax relief. More important is the restoration of the American people's confidence in our markets, our institutions, and in our economy.

Scott Schedler is president of The Motley Fool.