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Dividend Taxcut - New Details
FTN Financial Economics AM Comment - via e-mail | 1-9-03 | Chris Low

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

Although this information has been obtained from sources which we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Offerings are made by prospectus only. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumptions may have a material effect on projected results.

FTN Financial Group and FTN Financial Capital Markets are divisions of First Tennessee Bank National Association (FTB). FTN Financial Securities Corp (FFSC), FTN Financial Capital Assets Corporation, and Midwest Research Securities Corporation (MWRE) are wholly owned subsidiaries of FTB. FFSC and MWRE are members of the NASD and SIPC. Equity research is provided by MWRE and FFSC. FTN Financial Group, through FTB or its affiliates, offers investment products and services. (c) 2003

TOPICS: Business/Economy; Government; Politics/Elections
KEYWORDS: bush; dividend; taxcut
I don't think anyone else has picked up on this very important detail yet.
1 posted on 01/09/2003 7:19:57 AM PST by Cicero
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To: Cicero
Actually, I think it's good to ENCOURAGE dividends. When companies paid dividends (and some still do) it was a reflection of their financial strength. They were returning to shareholders a portion of the profit. The main criticism of all the dot-bomb and technology companies was the fact they never returned dividends - all the profit was spent supposedly on 'capital re-investment' when in fact they were blowing out money on foolish endeavors.

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.

2 posted on 01/09/2003 7:26:51 AM PST by fogarty
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To: fogarty
This doesn't either encourge or discourage dividends. The present system discourages dividends because they are taxed at a higher rate. The new system will leave it up to the company to set their dividend rates as they think best, without government pressure. That seems good to me.

If a company can convince shareholders that they can put the money to better use by reinvesting it, then shareholders will bid up the stock price. The new tax law would eliminate an artificial distortion of the free market system.

And it will leave individuals free to buy safe dividend-paying stocks or to take a flyer on riskier but potentially more profitable companies that reinvest for growth. In other words, more freedom for investors with less tax penalty for choosing whatever they prefer.
3 posted on 01/09/2003 7:39:32 AM PST by Cicero
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To: Cicero
I have trouble believing this is true. It's not even remotely feasible. Let's say I owe a stock for three months and then sell it. In order to calculate my capital gains tas, if any, I have to read the corporate report and figure out how much earnings per share, if any, can be added to the basis?

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.

4 posted on 01/09/2003 7:39:36 AM PST by Dog Gone
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To: fogarty
Quite right. I think removing double-tazation by not taxing the individual receiving the dividend is the wrong way to do it. The corporation should not be tazed on profits paid to the stockholders, but the stockholders (provided they are not tax-exempt fiduciaries like pension funds) should be taxed. In point of fact, morally, since the stockholders are the owners of the enterprise, it makes sense to apply income tax only to profits paid as dividends when received by the owners. There really should be no corporate income tax at all, since reinvested profits (not paid as dividends) aren't really realized. Unfortunately, the political landscape being what it is, I fear this would be infeasible, despite the boon to not only business, but the investing public, union pension funds included.

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.

5 posted on 01/09/2003 8:05:04 AM PST by The_Reader_David
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To: Dog Gone
That occurred to me, but it doesn't altogether surprise me. Presumably at the time of sale there will be some place to look up how much tax credit is involved for a particular company, and some sort of rule whether you get a particular year's credit or not, depending on how much of the year you own it. I haven't seen the original Treasury report.

As you say, this would be a PITA to calculate, but it would hardly be the first time the IRS made you jump through hoops to collect a legal tax break.

I have some assets in a Charles Schwab on-line account, and this past year they sent me a detailed statement on exactly what I owed for capital gains. This is not what they report to the IRS, so you don't necessarily need to use their reading of the figures. But I would guess that in the future the capital gains relief might be calculated by brokers' computers.

All this is theoretical until a bill passes and is signed, of course.
6 posted on 01/09/2003 10:55:06 AM PST by Cicero
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To: Cicero
Bush Dividend Proposal Is Taxing On ADRs, Foreign Buyers
Thursday January 9, 3:50 pm ET

NEW YORK -(Dow Jones)- As more details are revealed, it's becoming evident that under President Bush's dividend tax plan, investors who own foreign stocks that trade on U.S. exchanges may not receive much of a break and foreign investors will see none.

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

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.

7 posted on 01/09/2003 2:23:34 PM PST by Dog Gone
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To: The_Reader_David
In point of fact, morally, since the stockholders are the owners of the enterprise, it makes sense to apply income tax only to profits paid as dividends when received by the owners.

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.

8 posted on 01/09/2003 2:50:41 PM PST by AFreeBird
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To: AFreeBird
We already have tax-sheltered investment accounts for a variety of purposes. Abolishing the taxation of dividends would make these marginally less attractive by offereing benefit only to non-tax sheltered portions of portfolios.

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).

9 posted on 01/13/2003 9:42:53 AM PST by The_Reader_David
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