Skip to comments.Dividend Taxcut - New Details
Posted on 01/09/2003 7:19:57 AM PST by Cicero
FTN Financial Economics AM Comment: January 9, 2002
One big criticism of the Bush economic plan is that a dividend tax cut might discourage retained earnings and reinvestment.
Now, Treasury has published the details and it turns out that NO earnings will be double taxed. This changes everything. It means that if a company pays taxes on $5 per share and pays a $2 dividend, the basis of the stock will be raised by the remaining $3, effectively sheltering that portion of any capital gain from tax. That means that companies paying no dividends will pass the same tax advantage to investors as companies paying dividends.
Bottom line: investors will pay no tax on ANY taxable corporate earnings whether realized as a dividend or a capital gain.
- Chris Low
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A proper balance needs to be restruck. We need to return to the the perspective that returning dividends to stockholders is a good thing, and it is a sign of strength in companies to do so.
And what happens when a company restates their earnings after I file? I have to do an amended return?
I ain't buying this. It would be far easier to eliminate the capital gains tax altogether than to add an incredible amount of complexity to an already complex system.
Elimiating double taxation at the corporation level rather than the investor level would boost pension funds (including union pension funds making DemonRAT opposition harder) and taz-sheltered accounts like IRA's and Coverdells, as well as being a boon to tax-paying investors by increasing dividends.
The stimulus effect on the econoomy would be far greater than just eliminating taxation at the investor level.
And no, I don't support income tazes at all. I'd rather see the whole income taz system, individual and corporate replaced with a national VAT.
The limitations - which could mute the dividend proposal's positive impact for investors and the stock market - became apparent Wednesday night, when Treasury officials held a briefing to provide greater detail about the economic stimulus package Bush unveiled on Tuesday.
Some holders of American depository receipts, or ADRs, which are dollar- denominated securities that represent holdings in foreign companies, won't benefit as much because companies that qualify under the Bush plan must pay U.S. taxes and overseas businesses pay much less U.S. income tax than domestically based businesses.
The news has taken ADR investors by surprise and "they are hollering," said Robert Willens, tax and accounting analyst at Lehman Brothers.
As a result, certain ADRs could lose some of their appeal, hobbling the performance of large, stable foreign stocks that are part of several major U.S. stock indexes and have rewarded investors well in good times, analysts say.
U.S. mutual fund investors may be the most affected by the lack of tax benefit for ADRs because these investment vehicles are the biggest owners, with Fidelity Management & Research, Putnam Investment Management, State Street Global Advisors and Templeton Investment Council among the top 10 in terms of share positions, according to ADR.com.
All told roughly 550 ADR's trade on U.S. stock exchanges, with BP PLC , GlaxcoSmithKline PLC , Novartis AG , Royal Dutch Petroleum and HSBC Holdings PLC being among the largest.
Also, under Bush's proposal foreign investors would not qualify for the dividend tax elimination because they do not file U.S. income tax returns.
That may not go over well with a myriad of overseas investors who have made a large commitment to the U.S., analysts say. Indeed, overseas buyers hold an estimated 20% of all U.S. equities.
"You could see some foreign institutional investors saying, 'Hey, what about us,' " said Chris Hyzy, head of investment policy for Merrill Lynch's international private client group.
"But at the same time, it's not like anything is being taken away from them," Hyzy said.
Indeed, foreign investors always had to pay taxes on their dividends and the way the proposal is structured - to benefit U.S. taxpayers and not push money out of the country, that approach remains appropriate, Hyzy said.
Right now, that's called a sub chapter S corporation. Where almost all profit is distributed to shareholders.
But, what you're proposing would, IMHO, kill the market for all but the wealthiest investors. We want to encourage the small investor back into the market. Not taxing the dividends is a great way to do that and younger investors can have the dividends re-invested building up a substantial portfolio to go towards retirement. And really, the more fiscally sound companies are usually the ones to pay any kind of healthy dividend, so re-investing should only carry a minimum of risk.
My proposal in its radical form would either result in more dividends or more corporate reinvestment, the former of which is functionally equivalent with removing the dividend tax at the individual level, the later of which would boost shareholder value and provide direct economic stimulus--which would be decided by each corporation, ideally by the shareholders, but alas, I realize probably by the management. And, it would benefit all investors in either case.
My proposal in its moderate form, which does not abolish corporate income tax, but defines profits paid as dividends as not being corporate profits would encourage more payment of dividends, and would thus benefit the small investor with a lower margin tax rate in comparison to rich individual investors than would abolishing taxation of dividends at the individual level (don't forget we still have a progressive income tax).