The act implements several basic but revolutionary tax changes.

The most distinctive aspect of the Jobs and Growth Tax Relief Reconciliation Act of 2003, (the "Act") is its remarkable brevity. The final law-a scant eight pages-is perhaps the shortest piece of major tax legislation in modern U.S. history. (By comparison, the Tax Reform Act of 1986, another landmark tax law, was supposed to promote "tax simplification," but instead offered up a mind-numbing 1,200 pages of alleged "simplifications.")

They say that good things come in small packages, and the Act gets a lot done in few words: This is a substantial cut in federal income taxes, and will have a major impact on how people invest and work in coming years.

The Act contains an estimated $330 billion in tax reductions, and in the process implements several basic but revolutionary tax changes that are extremely good for business in general, and for capital investors in particular. First, the maximum federal personal income tax bracket is cut to 35% from the current 38.6%, and the lower brackets are each trimmed by two to three percentage points, retroactive to January 1, 2003. (These 2003 changes effectively accelerate the scheduled tax reductions previously enacted by the 2001 Tax Act, except that the tax cuts now take effect immediately rather than over a fairly lengthy period of years.)

The biggest changes introduced by the Act are a reduction in the long-term capital gains rate from 20% to 15%, and a cut in the dividends tax rate from the current ordinary rate of up to 38.6% to a rate equal to the long-term capital gain rate of 15%. In effect, the tax on dividends is cut to just 15% from almost 40%-an amazing sea change in the taxation of C corporations and their shareholders.

The Act also contains a variety of broadly popular tax incentives and benefits, including a temporary increase in the child tax credit to $1,000 from $600 for many taxpayers, relief for married taxpayers from the so-called "marriage penalty," some alternative minimum tax relief, a temporary increase in the Code section 179 deduction (allowing companies to deduct capital investments up to $100,000 instead of depreciating them over a period of years), and an increase and the extension of the "bonus depreciation rules" basically allowing a 50% bonus depreciation for certain property placed in service after May 5, 2003, and before January 1, 2005.

What does it all mean? Well, the clearest unequivocal winners under the Act are people who invest in the stock of domestic C corporations-particularly investors who own publicly traded stocks that pay significant dividends.

For years, the Internal Revenue Code has been overtly hostile to C corporations, subjecting corporations to a brutal "double tax," the first taxing corporate income and the second taxing dividends. Private companies, as a result, are almost always "pass-through" entities (S corporations and LLCs). Virtually the only U.S. businesses that today operate as C corporations are publicly traded companies (required by law to be C corporations) and venture finance-backed companies not eligible for S status (i.e., companies hoping to go public). From this perspective, double taxation was really just an awkward "proxy" tax on our capital markets; tellingly, almost no other major country imposes double taxation on corporations.

Thanks to the double tax, C corporations had an incentive to issue debt rather than equity (this was a "back door" form of pass-through taxation, since the corporation could deduct interest payments and thus corporate profits were effectively taxed one time, as interest income, to lenders). Corporations also regularly bought back their own shares instead of paying dividends, because this created capital gain and helped stock prices. Meanwhile, real estate investment trusts (REITs) got a boost because they are another form of pass-through entity.

The new Act does not eliminate double taxation, but it reduces it by taxing dividend income at capital gains tax rates, and reducing the capital gains rate to 15%.

How should investors take advantage of this tax law change? To begin with, the Act creates greater incentives to invest in equity and obtain capital gains treatment and/or dividend treatment. However this change is only relative, and in fact double taxation, while reduced, continues to distort the U.S. capital markets.

To illustrate the cost of double taxation and the impact of the Act, compare the level of pre-tax income that a C corporation was required to earn, before and after the Act, in order to give a capital provider a $1 after-tax return. Assuming a corporate-level income tax rate of 34%, a corporation that borrowed its capital pre-Act had to earn $1.66 and pay this amount out to its bondholder in order for a bondholder, in the 39.6% federal tax bracket, to net $1.00 after taxes. By comparison, a pre-Act corporation had to earn $2.51 in order to pay a corporate-level tax of 34% and then distribute a dividend of $1.66 which, subject to a tax rate of 39.6%, would leave an after-dividend tax return of $1.00. This simple math highlights the pre-Act disparity between debt and equity, and the incentive to both capital providers and capital seekers to use debt rather than equity to finance a C corporation.

Under the new rules, the cost for a corporation to provide a $1.00 after-tax return on a dividend basis is now reduced to $1.78, based on a 34% corporate tax rate and a 15% dividend tax at the shareholder level. This is still not as good as the amount needed to provide a $1 after-tax return on debt-a C corporation following the Act must pay out $1.54 in interest (taxed at a 35% individual rate) to produce $1 in after-tax return-but the "earns gap" between borrowed capital and invested capital has been reduced substantially.

Likewise, investments such as real estate investment trusts (REITs) that currently enjoy a single level of taxation have not been harmed by the Act. However, the reduction in double taxation means that there should be some shift in the direction of equities from both REITs and debt.

I anticipate the market place will respond to the Act in the following ways:

There will be a lot more pressure on cash-rich companies to give the money back to shareholders. Before, when dividends were taxed at about 50% (federal and state) most investors wanted the company to reinvest earnings, in the hopes of boosting stock prices and, eventually, earning capital gain on the stock. Now, since capital gain and dividends are taxed equally, the shareholders will want the cash now.

There will be (and already has been) a market shift toward equities, especially those that pay dividends, and away from debt, where the investment return is still taxed at individual rates (now 35% in the maximum federal bracket).

Investors, naturally, will want both the tax-favored treatment of dividends and the predictability of interest payments. Look for corporations to suddenly offer lots of preferred stock, and for mutual funds to gobble it up and offer a diversified portfolio of dividend-paying stocks.

REITs and other pass-through entities should continue to do well (after the market adjustment shakes out) because C corporations are still at a disadvantage.

People are going to think harder about whether to fund 401(k)s, IRAs, and other tax-deferred investments. Tax rates are pretty low right now, and the question is whether it is better or worse to avoid income today (at 35% maximum rate) and defer it to the future when the rate may be much higher.

One final thought: A 15% capital gains rate is so low that anyone holding capital gains may be tempted to churn his portfolio while the rates are so low. Thus, fear that the 15% rate is transient may, ironically, provide an unexpected surge in tax revenues and make the Act a surprisingly successful revenue raiser. After all, when it comes to tax legislation, the only law that always applies is the law of unintended consequences. Let the fun begin.

Joseph B. Darby III is a shareholder in the Boston office of the international law firm of Greenberg Traurig. He practices in the areas of business law and corporate and individual tax law.