[crazycanuck]

I think it's worth clarifying what's meant by the "double taxation of dividends". This refers to the fact that the company (at least in theory) already paid taxes on its profits, which are then taxed again as ordinary income when passed on to shareholders in the form of dividends. Arguably, this second tax occurs even when the profits are returned as capital gains (which is the case with buybacks), but in that case a) the tax rate is much lower, and b) the shareholder can choose to defer the tax payment by simply holding onto the stock until a future date. Long story short, the preference for buybacks over dividends is not about avoiding double taxation per se, but rather minimizing the tax rate of profit distributions. Per OP, one way to fix this would be to tax them the same regardless of the distribution mechanism.

[jrochkind1]

Another example of how taxing capital gains at less than 'ordinary' income has all sorts of weird and often undesirable effects.

Of course, I guess the argument for it is that it has the favorable effect of encouraging capital investment, that's what it's supposed to do right? I am curious what evidence there is of how well it does that.

According to wikipedia, capital gains were taxed as ordinary income in the U.S. until 1921, and the history since then have gone up and down -- but are currently at their historical low. http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United....

[ageek123]

In many countries, capital gains are not taxed at all: http://en.wikipedia.org/wiki/Capital_gains_tax

[jrochkind1]

I haven't actually counted it up from the wikipedia article, just skimmed, but looks like maybe mostly "developing"/"third world" countries? Which are desperate to attract capital investment, and usually not entirely in control of their own fiscal policies.