Passive components shortage imminent? (Dividend) Tax changes could cut manufacturing

Passive components shortage imminent?

Tax changes could cut manufacturing

By INQUIRER staff: Friday 14 February 2003, 19:18

Shawn Wood, analyst at iSuppli, has warned that passive component suppliers face an uphill struggle to keep their capital investments going at a steady rate. He outlines three possible scenarios in a new report. The most likely scenario is that demand will outstrip supply and prices will rise as a result of the tax changes.

Companies in China ramping up production to meet demands is another possibility, though Wood finds that idea far less likely. Consumer demand dropping due to high prices is another option.

At the moment, many American passive component suppliers plough money back into adding new facilities or improving existing ones rather than paying share dividends. If they start paying out, there may not be any money left to keep doing that.

If the companies do not start to pay dividends, shareholders would be likely to switch to shares that do pay out. That would almost certainly drive the share prices down and lead to still further problems. µ

So in addition to not helping any working people (unless they are millionairs or actually own stock outright NOT in 401K's, IRA's or Pension funds) this tax cut will actually hurt businesses.

It is hard to believe anyone could favor this tax cut. 95% of people that own stock do so in 401K type accounts. None of them will bennifit one bit directly and will still be double taxed. Once when the Company pays it's taxes and again when they withdraw their money from their IRA. This cut only makes sence at the Company level. Give Companies a Tax Dividend deduction on their taxes.

Even this would still hurt a lot of small business that can not afford to pay dividends. It will mostly help the Microsofts and GE's of the world along with the Kennedy's and other multi millionairs who inherited their wealth.

I am hardly a Democrat. I have never voted for a Democrat in my life. I fully support the rest of the tax cut. I would also support a Dividend cut on the Corporate side.

On Rush Limbaugh today a tax expert called in and Rush gushed about this tax cut (I gurantee he will bennifit). The expert explained that IRA's and 401K's will get no dirrect bennifit from this tax cut. When you withdraw you will pay taxes on the money withdrawn including that from dividends. The idea is it will be at a lower rate but many times it will not. It could even be at a higher rate if you invest well.

I have a hard time believing how many people think they will bennifit from this tax cut. How will you bennifit? I know very few people that actually bought stock they invest through 401K's. Or they might have stock in a company through their employer but even then it is usually in a tax defered plan. None of us will bennifit.

I can't believe that I feel compelled to waste electrons to point out how stupid this article is. I am sure that the stupidity is self-evident, but, just for the record, I want to explain why this article makes no sense.

Currently, when a company issues stock, it gets a certain amount of money for the stock, based on what investors think they are going to get out of it.

If a stock does not pay dividends, then the stock is worth only what the investors feel will be the likely future value of the company at the point that it either issues dividends or is broken up, or is otherwise returned to the shareholders.

If a company does pay dividends, then the future value of that dividend stream is also factored into the price. The price of the stock goes up with a regular dividend stream. That dividend stream is less risky and more immediate than depending on some long-future payout, so the price of the stock should go up close to the full value of the dividend stream. However, the value of the dividend stream is decreased by the taxes paid out of those dividend checks, so, for some investors, that dividend stream is worth less than simply letting the company keep the money.

That's a key point. In the current dividend-taxing environment, stock has to be priced low enough to encourage people to invest when (1) capital gains are uncertain and far-off AND (2) dividends are taxed.

IN THE BEGINNING, when the company is ISSUING THE STOCK, the tax on dividends REDUCES the stock value, and thus reduces the money available to the company from stock sales. This reduces the ability of a company to make whatever solid investments it's pitching in order to get that investment money.

Later, if the company makes a profit, then the non-dividend paying company might wind up with cash that, if paid out to shareholders, would represent only a small benefit to the shareholders. (because the dividends would be taxed). In that case, the shareholders (and thus the company) would actually be better off investing in whatever low-yield project comes along TO THE SAME COMPANY RIGHT NOW that can soak up that extra cash and not require the payment of dividend taxes. Needless to say, restricting the uses of that cash to whatever projects ONE company can handle RIGHT NOW, rather than returning the cash to investors who can explore the entire universe of investment possibilities, would likely result in the best possible investments for that cash not being made.

Bottom line: taxing investments, either through dividends, capital gains taxes, or whatever, REDUCES the amount of investments (or at least makes bad investments seem better, which is just as bad). Untaxing investments should INCREASE the profitability, and thus the amount, of good investments.

</rant>

I believe the article was just pointing out that people will tend to invest more in dividend paying companies and that could hurt some that are not making a profit yet or are still expanding and thus not paying dividends.

My problem with Bush's proposal was he was not brave enough to propose reducing the taxes paid by the company. I believe that companies would be helped far more by their taxes being reduced when paying dividends than indirectly by some stock holders recieving a bennifit. This would have the side bennifit of helping every stock holder (even the "poor" guys invested in 401K's).

If you examine this dividend taxs cut you will see that ir really trully mostly bennifits the only top 3% or so of tax payers that own many stocks in their own names. The vast majority of middle and even upper class citizens will not bennifit because they safely invested their money in retirement funds.

Dear Mr. ImphClinton,

Please understand that I do not mean this as an insult, but only as what I see as an accurate description of a fact: I think you really don’t understand what you are talking about here. At least, it seems to me that you are missing the great point of investments: people invest in order to make a profit on their money.

You say “the article was just pointing out that people will tend to invest more in dividend paying companies and that could hurt some that are not making a profit yet or are still expanding and thus not paying dividends.” That sentence indicates that you don’t understand that people invest in companies in the expectation that EVENTUALLY the company will make a profit and EVENTUALLY the investors will get dividends. Remove the taxes from dividends, and you increase the value of those future dividends when the company DOES make a profit.

Just to be complete: there is always the possibility that the company may be purchased or be broken up, or otherwise cease to exist, and that dividends thus won't be paid. In that case, the investors expect to have some claim on the proceeds of some sort of breakup/sale of the company. If dividend taxes go to zero, while other corporate taxes remain, then it’s a pretty good bet all proceeds from the breakup / sale of a company will be distributed to shareholders as dividends, and those proceeds will be worth more to investors if they are not taxed.

In either case, no matter what the taxes are, the cash flow from operations (profits) that the company makes is the same whether or not dividends are taxable; the value to the shareholders, however, is greater if the dividends aren’t taxable, even for companies that aren’t currently paying dividends. Even the investors of temporarily-unprofitable companies, then, benefit from reducing the tax on dividends. In other words, people should be more willing to invest in all potentially-profitable companies if dividends are untaxed than if dividends are taxed.

You also wrote, “My problem with Bush's proposal was he was not brave enough to propose reducing the taxes paid by the company. I believe that companies would be helped far more by their taxes being reduced when paying dividends than indirectly by some stock holders recieving a bennifit.” I don’t think that’ll be a problem if the zero-rate dividend tax goes through. It’s pretty easy to predict that any taxable income generated by companies will simply be remitted to the stockholders as dividends, avoiding taxes altogether. Why would a company do that, you ask? Simply because, if they do, then they will increase the value TO THE SHAREHOLDERS of their stock by the full value of that taxable-income-turned-into-dividend-payments, rather than only by the value of taxable-income-less-taxes. Issuing the excess cash will make all the stock worth more, including the stock held by company officers.

You wrote “If you examine this dividend taxs cut you will see that ir really trully mostly bennifits the only top 3% or so of tax payers that own many stocks in their own names. The vast majority of middle and even upper class citizens will not bennifit because they safely invested their money in retirement funds.” Huh? Retirement funds are taxed upon retirement; they are tax-deferred, not tax-free. Reduce the dividend tax rate to zero, and structure the funds so that investment income occurs in the form of dividends rather than capital gains (should happen automatically, as I explained in the paragraph right above this one), and retirees will get more out of their retirement funds than if dividends were taxed.

Of course, the devil is in the details, and there may be special provisions in the final tax law that render incorrect everything I wrote. To a first approximation, however, a lower tax on investments benefits EVERYONE who invests, and EVERYONE who might sell something else to those newly-richer people who invest. In other words EVERYONE (except CPAs, tax attorneys, and bureaucrats) benefits.

IN THE BEGINNING, when the company is ISSUING THE STOCK, the tax on dividends REDUCES the stock value, and thus reduces the money available to the company from stock sales. This reduces the ability of a company to make whatever solid investments it's pitching in order to get that investment money.

One of the great strengths of the American economy as opposed to its competitors is the creative entreprenurship that freedom engenders. That "front end" if you will of the industrial economy is all that keeps American wage earners from competing on price/performance of labor alone.

The model you have favoably described here would appear to favor established companies over those just having completed an IPO. I'm not so sanguine that this shift in tax emphasis motivates the solid long term prospects you infer, especially given the shrinking duration of the average product life cycle. There is an increasing propensity for new technologies to appear from totally different base disciplines than those they replace, wiping out principal investments of even the best run of established companies. Given that trend, the dividend history of a company will be a decreasingly reliable indicator of prospective risk. It is certainly not the tax emphasis by which to stimulate the economy into long term growth that I would have chosen.

I am not an expert. You said
"I don’t think that’ll be a problem if the zero-rate dividend tax goes through. It’s pretty easy to predict that any taxable income generated by companies will simply be remitted to the stockholders as dividends, avoiding taxes altogether."...

I am prety sure that the tax cut is on personal Income Taxes not Corporate as proposed by Bush. That is certinally how Bush explained it.

You said: "Retirement funds are taxed upon retirement; they are tax-deferred, not tax-free."
I do not see how retirement funds could be helped except by new Companies, like MS, paying dividends. Even in this case MS stock concievably will not raise in price as quickly thus negating the dividend for the IRA holder. Furthermore the defered taxes will remain the same. They will still pay taxes twice on the same money. Unless you are right and the tax cut is at the corporate level in which case I support it.

"I don’t think that’ll be a problem if the zero-rate dividend tax goes through. It’s pretty easy to predict that any taxable income generated by companies will simply be remitted to the stockholders as dividends, avoiding taxes altogether."...

Sorry, I wrote that in a sloppy manner. In fact, now that I reread it, the word “altogether” was a mistake, and makes the sentence say something I did not mean at all. I meant to point out that, if the company makes a profit, that profit, after being taxed, will probably be remitted quickly to the stockholders, rather than being kept as retained income. This will reduce the bank account of the company, and thus reduce the capital gains enjoyed by the stock. For the most part, this will allow the STOCKHOLDERS to avoid MORE (not all; this is where I should not have used the word “altogether”. That was my mistake) stock taxes, since their profits will come more in the form of dividends, less in the form of capital gains. However, stockholders may still be subject to SOME capital gains taxes, since there are plenty of other factors that make stock price go up or down. However, you are right, the companies will still have to pay tax on their profit, and I was wrong, (investors + companies) will not be able to avoid taxes altogether. Nuts.

You wrote “I do not see how retirement funds could be helped except by new Companies, like MS, paying dividends. Even in this case MS stock concievably will not raise in price as quickly thus negating the dividend for the IRA holder. Furthermore the defered taxes will remain the same."

You picked a perfect example of a company whose investors could benefit from zero-dividend tax. Microsoft’s price has risen every quarter since 1976 (I think), partly because the company is a money-generating machine with nowhere to put the money it generates. Thus far, every dollar that Microsoft has made (after expenses) has gone into retained earnings, i.e. the BIG bank account. In fact, MS has the largest cash reserves of any company in the world. That BIG bank account represents value that current stockholders expect (reasonably enough) will come to them someday, when MS issues dividends, or is bought by some other company (!) or somehow distributes the profits of the company back to it’s shareholders.

Well, that time has come. MS is going to start issuing dividends. If dividends are untaxed, it would make perfect sense to issue ALL the contents of that BIG bank account as dividends (less whatever is needed for operations, R&D, some cash reserves, etc). That issuance will benefit the stockholders by sending them untaxed money. If dividends are high enough, the stock price will stop rising, and may actually fall, as investors realize that the cash is leaving the company, but the value of the company TO INVESTORS will probably rise, since the combination of (near-term, untaxed dividend payments) + (payable-in-the-distant-future, taxed retained earnings) + (unpredictable, largely-based-on-the-whims-of-the-market other capital gains) will be greater.

Now, back to your concern, retirement funds. The retirees are investors. Today, whatever money they get out of their retirement fund, be it from dividends or from capital gains, is taxed. If the dividend tax rate becomes zero, then only the capital gains they get out of their retirement fund will be taxed. The dividends generated by the stock in that retirement fund will “never” be taxed. Further, as I have tried to explain, companies can and probably will arrange their affairs to maximize dividends and minimize capital gains. Therefore, retirees, like other investors, will see a rise in the amount of UNTAXED money coming to them, though they may see a drop in the paper value of each stock certificate. To try to make this more clear: the stock certificate may not be worth any more, or may be worth less, but the combination of (the stock certificate) + (dividends, which are now untaxed) will be worth more.

You are not the first person who said that Retirement accounts could have tax free gains.

I thought the idea was nothing is taxed untill retirement when money can be withdrawn penalty free. Then tax is paid with the withdrawal being considered ordinary income. Most money is kept in accounts that leverage many stocks. Dividends are simply reinvested as are any capitol gains. The fund has an annual profit or loss. Is this wrong?

You seem to be saying that any stock sold is considered a capitol gain. I suppose this could be kept track of but not eaisly. Are there several internal accounts keeping track of money from dividends, capitol gains etc? Seems this would cause a nightmare when computing taxes after withdrawing money. I mean do you have to draw a portion from each fund or can you choose? Do you get a 1099 that list each kind of money withdrawn?

As I said before, the devil is in the details. Of course, the final implementation of any tax law could make it impossible to avoid dividend taxes, but I expect that retirement fund managers will, in fact, quickly move to segregate dividend-derived income from any other income in the fund.

Would such segregation be more complicated than simply deferring all the taxes, then taxing retirement distributions as ordinary income? Sure. Would you as the retiree ever see any of that complication? Probably not. For the fund management company, it would be trivial to keep track of ALL the investments / reinvestments / capital gains to determine the taxes you should pay at the time that you cash out. It would probably be just as trivial to arrange things so that whatever distributions are made are made out of dividends than out of capital gains. For a fund which is paying out money over many years, it would be easy to pay out money out of dividends when the market is up (thus avoiding taxes, because the dividends are untaxed) and out of stock sales when the market is down (again avoiding taxes, because you don't pay capital gains when the stock you sell has LOST money). On average, barring bubbles, unforseen events, poor diversification, rampant inflation, and a host of other issues, most fund managers will probably be able to pay off the retrirees with mostly tax-free money.

However, the story is even a little better than that for the investors / retirees. Today, as you said, dividends are re-invested into stocks, and mixed in with other dividends and with cap gains. The retirement fund, and the investors in that fund, then wait for the investor to retire, so that the investor will be eligible for a lower tax rate (because the investor preseumably has a smaller income in retirement). If dividends are taxed at 0 percent anyway, then why not simply distribute ALL the dividend income to the investor NOW, rather than wait for retirement? The investor could, of course, choose to reinvest, but (and here's the really good part) the investor could also simply keep the money. Again, the devil is in the details, and the final tax law may require the payment of taxes on money that's been put into a retirement fund and then taken out before retirement. I just don't know. In general, however, the total tax rate on whatever returns are generated by the retirement fund will probably be lower under a zero-dividend-tax system, and than it is now, and thus investors / retirees will be better off. Whether they will get to pay zero tax on thier investments or just low tax on thier investments is still up in the air, but either option is better than the one we have now.

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.