> Over time, share repurchases became a substitute for dividends. Managers rationalized the practice by saying they were doing shareholders a favor: Dividends were taxed as ordinary income, whereas capital gains were taxed much more lightly. Moreover, capital gains taxes weren’t payable until shares were sold, while taxes on dividends had to be paid annually. Assuming a share repurchase raised share prices by the same amount as would be the case if the money were paid out as a cash dividend, taxable shareholders would prefer share buybacks.
Dividends are taxed as ordinary income and the top marginal income tax rate was incredibly high at various points in history (94% in 1944 and more than 50% till 1986). Capital gains taxes are lower so the government has given corporations a massive incentive to pay less dividends.
The article is very critical of corporations, which is fine, but let's not forget about the bizarre incentives that governments give, for no apparent reason. "Managers rationalized the practice by saying they were doing shareholders a favor" could easily be rephrased as "Corporations were pressured to change shareholder payouts due to tax laws...".
Angelo Mozilo's story is a great example of misaligned incentives and minimal consequences: https://en.wikipedia.org/wiki/Angelo_Mozilo
Buffett has a great criticism of stock option compensation: https://www.nytimes.com/2002/03/11/business/stock-options-ar...