(FORTUNE Magazine) – You can smell it a mile away from the White House. It's the odor of capitulation on the dividend tax cut--and it stinks.

So-called moderate Republican Senators are openly grumbling about lost revenue and the effects on the budget deficit. The powerful chairman of the House Ways and Means Committee, wary of class warfare, is "noncommittal." Even among George W. Bush's chief emissaries to Congress--the ones entrusted with selling the initiative--the rhetoric has softened ever so slightly, from "What the President wants..." to "If the President gets what he asks for..."

But it will be a pity if Bush buckles on the dividend issue. While it may not provide as much immediate stimulus as the White House claims, the dividend tax cut offers something more important: an antidote to the short-term trading mentality that brought on the frenzied rise and fall of the stock market.

That speculative fervor was propelled not only by such obvious culprits as greed and euphoria, but also by the U.S. tax code. By taxing corporate dividends twice--once at the corporate level (at rates up to 35%) and then again at the personal level (at rates up to 38.6%)--Uncle Sam has pushed most public shareholders to stow their investment profits into what you might think of as a humongous corporate tax shelter. Instead of banking a modest portion of what their company earns each quarter, stock owners let the company's managers keep the cash--to either spend it on growing the business (thus, presumably, lifting the share price some day) or redistribute it in the form of share buybacks.

While it sounds reasonable enough, this tax-avoidance strategy has steadily and surely made corporate managers less accountable to their shareholders and made shareholders more likely to jump in and out of stocks--costing them money, let's not forget, with each transaction. The tax code has helped turn would-be long-term investors into mere speculators. (See "Show Us the Money" for more.)

Given this utterly free hand in decision-making, too many corporate chieftains have done an embarrassing job managing "retained earnings." In a wide swath of industries--media, telecom, Internet, airlines, retail--handsomely paid executives have grown several of your businesses right into Chapter 11.

None of this is to say that companies should drain their coffers of capital to pay shareholders. Growth is still the fundamental aim, and growth requires investment. But one could argue that the reason dividend-paying blue chips such as GE, P&G, and Gillette have grown so consistently (the group trounces the S&P 500 over 20 years in total shareholder return) is that they've been accountable to investors in the form of modest profit sharing--despite the tax disincentive. Even Microsoft has seen the light, recently declaring a tiny payout.

"Dividend payments are the shareholders' way of monitoring managers," wrote former Clinton Treasury Secretary Lawrence Summers back in 1984 when he was a mere Harvard professor, echoing an argument made by economists of every political bent. "When dividend taxes are reduced, shareholders find monitoring cheaper and do more of it." Cutting the dividend tariff also has the benefit of reducing the temptation for companies to OD on debt, and it lowers their cost of capital. No wonder nearly every industrialized country in the world offers some relief from double taxation of dividends.

So why has it taken so long for us? Because to some, it seems a disproportionately large gift to the rich. That argument not only misses the point, it's also dead wrong. Yes, people who receive more dividends will pay less tax than they would in the past. But everyone who holds stock--53% of American households--will benefit as new investment money chases higher equity returns. More than two-thirds of a typical large-cap index fund is composed of dividend-paying stocks. Those indexes will rise in value whether they are held in a tax-sheltered 401(k), an IRA, a pension fund, or a taxable mutual fund.

Cutting the dividend tax is a giveaway to the rich in the same way that historically low mortgage rates are. Or mortgage-interest tax deductions, for that matter. Wealthy home buyers get back tens of thousands of dollars more over the course of a 30-year mortgage than low-income buyers. But low-income families have an easier time purchasing a home--that's an unalloyed good.

The one real problem a dividend-tax cut causes is that it could suck billions in revenues from the government's treasury, pushing the long-term deficit dangerously high. For that, though, there's an easy solution. Leave the top marginal rates for personal income tax at their current levels, or even raise them a bit. The rich will pay more--but, hey, they can afford it.