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.