Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

Dividend Tax Folly
Townhall.com ^ | December 14, 2012 | Linda Chavez

Posted on 12/14/2012 6:25:02 AM PST by Kaslin

While Washington pols pose and posture on whether to raise taxes next year, American businesses are busy taking action to avoid the hit their shareholders are likely to take come January. It's an old lesson that liberals never seem to learn. No matter how clever the tax hikers think they are, those who stand to be hurt by higher taxes usually figure out a way to protect themselves.

The Obama administration hopes to raise more revenue by allowing the top tax rate to rise to 39 percent (or 43.4 percent if you include the new tax to pay for Obamacare) on those small businesses and individuals earning more than $250,000 a year. But it also intends to hike rates on long-term capital gains and dividends, which are now taxed at a rate of 15 percent regardless of the income of the taxpayer. The dividend rates will revert to ordinary income tax rates, a more than 250 percent increase even before the Obamacare taxes are included.

The rationale for lower tax rates on investment income is sound. First of all, individuals who have chosen to invest their own money by buying stock have already paid individual and, often, payroll taxes on the money they use to do so, and the corporation pays taxes on the profits it earns as a result of that investment. When the shareholder sells the stock at a profit, or receives a dividend based on the company's earnings, that money has already been taxed twice.

More importantly in the case of capital gains, taxing long-term gains at the same rate as ordinary income provides a disincentive for investors to invest for the long haul. The result is that there is less capital available for businesses, which lowers long-term economic growth.

But the administration is only interested in raising more revenues, any way it can. The problem is, it won't work.

Here's why: Companies are already protecting their investors by issuing special dividends and paying out regular dividends early to help them avoid rate hikes next year. The Wall Street Journal posts daily the companies that are making early and special payouts, which will be taxed at the 15 percent rate if they are earned in 2012. The list, now in the hundreds, is a virtual Who's Who of top businesses: Caterpillar, Cisco, Dillard's, Oracle, Wal-Mart and Walt Disney, to name a few. And it includes several "progressive" companies whose executives supported President Obama in 2008 and 2012.

Costco's co-founder, former CEO and current board member Jim Sinegal, is a case in point. As the Journal reported, Sinegal went on the campaign trail in 2012 for President Obama to argue for higher taxes, but he and his fellow Costco directors figured out a way to protect themselves and their shareholders. The Costco board recently voted to approve a special $7 per share dividend to be paid to shareholders in December to avoid paying higher taxes next year. (In the interest of full disclosure, I, too, supported moving up the payout by a few days for a regular quarterly dividend for a public company on whose board of directors I serve.)

There's nothing wrong with what Sinegal and a host of others have done (though one might question whether Costco's decision to borrow $3.5 billion in order to award the special dividend is wise.) These companies are making decisions in their shareholders' interests -- and that is exactly what they are supposed to do. In the case of corporations, the money involved is the shareholders' -- no one else's. And directors' fiduciary responsibility is to maximize shareholder profit in a lawful and prudent manner.

But liberal policy makers never seem to understand the human instinct to protect and preserve what one has earned. They think that if they raise rates higher, revenues will increase automatically. What liberals never fully anticipate is that their decisions will change behavior in ways that will thwart liberal objectives. If long-term capital gains tax rates will increase next year, individuals have an incentive to sell now and pay lower taxes. If taxes on dividends will go up dramatically, corporations have an incentive (maybe even a duty if they're sitting on a lot of cash) to pay out those dividends early so that they'll be taxed at the lower rate.

If President Obama had ever spent one week working in the real economy, he'd understand this. But he's too obsessed with soaking the rich to figure out that we can never tax our way to prosperity. We're far better off trying to control government spending as a way to avoid the fiscal crisis ahead than to think we can avert disaster by waving the tax-hike magic wand.


TOPICS: Business/Economy; Culture/Society; Editorial
KEYWORDS: barackobama; jobsandeconomy; rich; taxes

1 posted on 12/14/2012 6:25:06 AM PST by Kaslin
[ Post Reply | Private Reply | View Replies]

To: Kaslin
Anyone who believes that they can tax a rich man is a fool and should be shunned. They didn't get rich by being stupid or by being robbed.

As a last resort, the rich will just buy the representatives that will provide the dodges (loopholes) to avoid the tax.

Another fallacy is taxing corporations. You just turn them into unpaid tax-collectors for the government.

Trouble is, there are an unending supply of stupid, greedy people to vote for demagogues promising to "Robin Hood" the rich.

Stupid is always in style.

2 posted on 12/14/2012 6:41:27 AM PST by Aevery_Freeman (The trouble with the "masses" is that they never achieve the "m")
[ Post Reply | Private Reply | To 1 | View Replies]

To: Aevery_Freeman

“As a last resort, the rich will just buy the representatives that will provide the dodges (loopholes) to avoid the tax.”

Here is a link to an article describing how Senator Chuck Schumer of New York, a leading progressive, fights to keep “carried interest” in the tax code which benefits wealth private equity partners such as Mitt Romney.

http://mycrains.crainsnewyork.com/blogs/greg-david-on-ny/2012/01/how-schumer-cut-romneys-taxes/


3 posted on 12/14/2012 6:56:13 AM PST by Soul of the South
[ Post Reply | Private Reply | To 2 | View Replies]

To: Kaslin
But the administration is only interested in raising more revenues, any way it can. The problem is, it won't work.

I think the administration knows that taxpayers will act in their own best interest.
The object of the tax increase is to get the capital moving. It is easier to tax capital when it is on the move.
It is also possible that this will be a bonanza for Obama's friends on wall street. They collect commissions when you move your investments to a more defensive position.

4 posted on 12/14/2012 7:11:29 AM PST by oldbrowser (Put Obama in check, now.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: oldbrowser
But the administration is only interested in raising more revenues, any way it can.

That's not true. If it wanted to raise revenues, it'd kill all the Bush tax cuts, as there's more money in the middle class than in the rich. At least that's what the old economics says would happen. In the Laffer view, you'd keep the Bush rates, and maybe trim them. What Obama asked for is to punish the rich, and it's purely a political move. The whole debt bomb/fiscal cliff thing is being handled primarily as a political problem, with the goal being the reduction of the Republican party to insignificance.

The object of the tax increase is to get the capital moving. It is easier to tax capital when it is on the move.

Nice theory, but only in the short term. A tax increase might get capital to move this year, but will encourage it to stay still for the next few years. The huge increase in tax on dividends is simply a sop to the corporate captains, who will no longer have to reward the muppet stockholders. They'll go back to the idea of retaining all earnings and try to grow the business by acquisition and stock buy-backs. Few big businesses, easier for D.C. to control. It will be ruinous for pensions, as the corporate CEOs will corzine a lot of that cash.

5 posted on 12/14/2012 4:53:59 PM PST by slowhandluke (It's hard to be cynical enough in this age.)
[ Post Reply | Private Reply | To 4 | View Replies]

To: slowhandluke
That's not true. If it wanted to raise revenues, it'd kill all the Bush tax cuts, as there's more money in the middle class than in the rich.

The administration will make any compromise unworkable by moving the goal posts. They have already said it must include the president having authority to raise the debt limit without congress.
They always intended to go off the cliff I believe. And the GOP will get the blame.

The fact that they are taking some GOP scalps and punishing the rich in the process is just spiking the football.

6 posted on 12/14/2012 5:35:19 PM PST by oldbrowser (Put Obama in check, now.)
[ Post Reply | Private Reply | To 5 | View Replies]

To: oldbrowser
If the administration had in mind raising revenue by any means possible, they'd compromise a bit. They don't care about revenue unless it's from the rich, and that's not enough to make a difference. Being Keynesians, they don't believe that debt is the problem, so raising revenues isn't necessary unless it is to punish your enemies.

Going off the cliff, and blaming Republicans is the whole point. After that, Obama gets to reinstate the Bush tax cuts and claim credit for doing so. He gets to do anything he wants. The only thing that going off the cliff does not do is to eliminate the debt ceiling, which would give him the last thing he needs for a completely free hand.

He's neutered the Supreme Court, as Roberts has proved to be a politician, not a judge.

He's neutered the Justice Department, there are no prosecutions for any banking violations, no settlements that cost any bank more than a small percentage of any illegal profits.

He's neutered the electoral process, with no checks on foreign money, no checks on who votes.

This is not about the money. It's about control.

7 posted on 12/20/2012 5:41:05 AM PST by slowhandluke (It's hard to be cynical enough in this age.)
[ Post Reply | Private Reply | To 6 | View Replies]

To: slowhandluke
He's neutered the Supreme Court, as Roberts has proved to be a politician, not a judge.

He's neutered the Justice Department, there are no prosecutions for any banking violations, no settlements that cost any bank more than a small percentage of any illegal profits.

He's neutered the electoral process, with no checks on foreign money, no checks on who votes.

This is not about the money. It's about control.

Check, check, check, and check. We have a de facto socialist government which is only a short step from communism.

8 posted on 12/20/2012 6:09:44 AM PST by oldbrowser (They are marxists, don't call them democrats)
[ Post Reply | Private Reply | To 7 | View Replies]

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson