Surprised this hasn't come up yet. Instead of the 50% dividend tax credit that they were talking about a couple of weeks ago, Bush is going to ask for a complete removal of the individual tax portion of dividend payments: http://money.cnn.com/2003/01/06/news/economy/bush_dividend.reut/index.htm While I agree that the double taxation of dividends is something worth reviewing, IMO it would be better if he did it in reverse -- make some portion of dividends tax-deductible to the companies, not the individuals, for two reasons: 1. If the idea is to spur investment, wouldn't it make more sense to get more money into the hands of the entities most likely to make investments (companies instead of individuals)? What is the likelihood that Joe Investor is going to take that few hundred bucks of extra tax deduction and invest it instead of spending it on foreign-made fun stuff? 2. There is a massive loophole in this plan that regardless needs to be closed dealing with executive pay. If I'm a CEO, I now want to be paid no salary or bonus, but instead just give me a amount of long-vesting restricted stock with dividend rights but not voting rights. Set it on a vesting schedule (say, 30 years) that I will never fulfill so I'll never actually get the stock (which would be a taxable event), but the company can still pay me in dividends tax-free instead of as taxable payroll income. If this passes as-is, within six months you will have tax lawyers and comp consultants all over this. And by the time the IRS gets the new rules in to close it, some people will have absconded with tens of millions of dollars. Thoughts, comments?
WE MUST FIGHT! This is going too far. Bush's tax schemes have wrecked our economy enough. A tax cut (or absolution) of the dividend tax is NOTHING but a further shift of the balance of power in this country to the extremely wealthy. While the average investor may save a few hundred or even thousand dollars a year, the Anschutz's and Kraft's of this country can bank millions of savings in one transaction. This will lead to a gross misbalance of power, and the continued increase of dominance in our society by those who already control politics, legislation, and what we read, see, and hear. Right now, the dividend tax is the ONLY curb on corporate America's power. The dividend reduces the incentive of organizing business under the corporate form due to the "problem" of double-taxation. What this means is that greater incentives exist to organize businesses in smaller forms that are not as capable of massive impact on our way of life. Removing the dividend tax plays right into the hands of the type of men who perpetrated the horrible injustices at Enron, WorldCom, and other conglomerates at the expense of thousands of ordinary workers. You remove the tax funds from the public domain and place it in the private sector and eventually the people have no power or influence to prosecute these wealthy criminals. I would go on but I have to work. FIGHT THE POWER!
Obie, I really like your thought process on #1 as it makes logical sense. Its the corporations that are employing a nation right now and I would have no problem seeing them shed this tax burden. Like you the fact that this money is taxed twice needs to be rectified and I hope someone can benefit from this. The market seems to responding somewhat positively to the rumors so far: ====================================== Stocks rise on Bush economic plan, telecom gains http://biz.yahoo.com/cbsm-top/030106/a2b9b8d1f61de367f0462a6fb4c88ae6_1.html "Art Hogan, chief market analyst at Jeffries and Co., credited Bush's economic plans and hopes for resolution to the Iraqi situation for the market optimism." "A repeal could boost dividend-paying stocks, encourage more companies to pay out earnings or hike their dividends and promote economic growth and productivity. It would also improve corporate governance by motivating companies to pay out their earnings - leaving less in the coffer to be squandered on ill-conceived acquisitions." "I look for the market to respond favorably to the news about the Bush tax cut plan. It is exactly the right thing to do, and I am pleasantly surprised," said Michael Holland, president of Holland & Co., a money management firm." ====================================== Of course we all fear that the wonderful start to the year for the market will all be for not should we end up going to war. Andy
ROFL Manalo, Have you playing hockey without your helmet again?I am not a fan of this strategy.. becuase I think it is not enough.And it Ignores small business, the backbone of our economy.But it will spur investement, and likely resulting in improving the Stock Market (Where banks, Insurers, and retirement plans make their cash). The funny thing is, the democrats who a few months ago were yelling that tax cuts were bad.. ARE NOW SAYING THEY WILL HELP.They just dont have the same plans as the Whitehouse.The one I like they are floating around is the "temporary Payroll tax reduction" .Which is a major strain on small businesses, and will likely result in lowering the unemployment rate.Coupled together both plans will spur the economy from top to bottom .By themselves I dont think they have the bite to fully help.
Well, who else besides the goverment is going employ people since the technological realities of mordern production dictate that relatively few people in society are self-employed? And what do you think the market will do when a political gift is proposed for investors? If stock dividends are suddenly tax-free, that automiatcially increases the value of current stocks. It will probably adversely impact the municipal bond market, however, as they now have to compete with stocks on a tax-free basis.
I believe the Dems are coming out with their economic stimulus plan soon (today?) It will be interesting to compare and contrast them. Andy
It will boost the stock market because it will make dividend-paying stocks a better investment tax-wise than bonds or other investments. But it won't help increase GDP unless you think that the tax cut money will go to real capital investment in new companies and new ideas, not just buying already-existing stocks. What it will most likely lead to is more stock churning, which increases revenue for financial services companies and, through the tax-free dividends, more money into the pockets of individual (read: rich) investors. After reading more about it, the fact that tax-free dividends won't be extended to institutional investors is the thing that will most likely end up killing this. Most individuals have their stock-related money in mutual funds, and hence would get no tax credit in the stocks in the fund. Instead, it's the high-wealth individuals who own more stocks directly who will get the tax cut, which will inevitably lead to charges of another big handout to the rich with relatively less to the middle class and poor. Considering that it's the second time that Bush has done this in his term, it's almost like he thinks he's bulletproof. We'll see about that shortly.
This is interesting. Every year I get distributions from my mutual funds that are comprised of short term capital gain, long term capital gains and dividends. I always assumed that these dividends came from the stocks that produced dividends from within the mutual fund. But if I am understanding you correctly they are not. Thank you for the information. Andy
No, they're not. The dividends are what they pay on their own stock, not the accumulation of the stock dividends that they collected from all of the shares held in the fund. Typically those payments out to you are less than what they take in.
Double taxation If double taxation is Satan's own invention, then why do I have to pay sales tax after I've already had income taxes taken out?
1. Obie - I had never thought of you as a supply-sider. 2. There is no doubt that the tax lawyers and accountants will be out ahead of the IRS in taking advantage of unintended consequences of any new law changes. This is an irrefutable fact of life and as certain as the laws of physics.
> The market seems to responding somewhat > positively to the rumors so far: Strange that the one major company that does pay good dividends (Philip Morris) is down half a buck a share.
Obie, on your next to last post I think you are beginning to see my side of things. However, my viewpoint is that these string of massive tax cuts by Bush are much more disastrous if you look beneath the surface. Of course, one would expect the news of repealing the dividend tax to give a short-term boost to the stock market. A similar effect usually occurs when corporations announce job cuts. That does not mean that people are better off. In fact, a lot of things that boost the stock market are not helpful to ordinary citizens, because the majority of the stock market is controlled by wealthy individuals and institutional investors that measure success based on the performance of stocks in their portfolios. (Granted, many of the institutional investors invest on behalf of ordinary investors like us, but our ownership is so miniscule that our share of any savings is a matter of dollars and cents). My point is that if you consider the bigger picture of macroeconomy, the performance of the stock market, as well as individual salaries and income are only measuring sticks that gauge human happiness and prosperity. They are reliable for the most part, but they can be deceiving to the extent that the real effect is a massive shift of power to a small percentage of wealthy families. And make no mistake, this is the effect of such a tax cut. Corporations will not benefit directly from repealing the double-taxation of dividends. Only individuals are subject to the dividend tax, and for every penny you save, a rich investor saves millions and is thereby able to have millions of times more influence on society than you. These are the wealthy individuals that lobby politicians, finance political campaigns, and determine what we see on the evening news. While I may sound like a Green party liberal, I am not. I am a CPA, and I understand the nuances of tax legislation and financial issues. And I am tired of everyone acting like sheep when right before our eyes the balance of power in this country is being shifted completely towards a few wealthy families, with absolutely no foreseeable benefit to society at large.
I'll weigh in here. First, you can be a Green party liberal and an accountant at the same time. Even the Greens should balance their books (or at least know how). Second, it makes no sense to exclude dividends from tax and leave interest-bearing investments subject to tax. Why should the tax system make a policy preference for one versus the other? No reason I can see. Both types of personal investments ultimately supply capital for business investment. Third, adopting a dividend imputation system to replace a double tax system (income tax at both corporate and individual levels) is extremely complex. Conceptually, I don't oppose it, but as it is a clear tax break for the wealthy, in the real world, I would not support this provision unless it were made up for somewhere else (e.g., additional rate brackets). Fourth, I'd be curious to know what amount of corporate dividends are already exempt from individual income tax because they are paid to (1) pension funds (2) individuals, directly or indirectly via mutual funds, that have their investments in a 401k or other tax-deferred vehicle, (3) tax-exempt organizations and (4) foreigners.
I believe they pay one of if not the highest dividends of any company. However they are fighting other rumors and issues today "10:03AM Philip Morris drops following price cut talk (MO) 38.20 -1.60: Stock is weak this morning following a pre-open note from Salomon Smith Barney, which said industry contacts continue to confirm that a major strategic change could be announced to MO's salespeople today; firm believes there is a good chance that the co will announce a drastic change to its current pricing/promo strategy given the pressure it has been facing, either by getting more aggressive on on its Basic pricing or by cutting wholesale prices on its four core brands; "
To answer your questions to the best of my ability: 1. YES YES YES OF COURSE. You've pinpointed the entire problem. These Bush tax cuts are painted to the American public as a stimulus to the economy, but they are merely gifts to the section of society that he belongs to and that financed his campaign. Dividends are strongly discouraged by the double-taxation regime, and therefore are only made when companies are extremely profitable, or for reasons of displaying goodwill to shareholders. Therefore, what is encouraged is reinvestment of profits, which is generally a good thing. 2. The nature and quantity of tricks that can be developed to take advantage of such a new law is of course enormous, but what you really have to look at is who benefits here. Dividends and CEO compensation have to be approved by shareholders, so although you can't automatically say that CEO's will run wild, it is obvious that CEO's are usually wealthy and own lots of stock. So they will surely support this. So will the men in the boardroom, who will certainly vote in favor of fat dividend checks whenever the company makes any money.
Corporations are subject to dividend taxes in that they are an expense that is not tax-deductible. While you can package the corporate side non-deduction and the individual taxable income issues differently, it's really all the same thing. Dividends are taxed twice unnecessarily. Just tax them once and be done with it. My concern is that by taking away the individual tax as opposed to the corporate tax, you are opening up a huge window for abuse. What's wrong with being liberal? You sure sound like a liberal. I'm a liberal who voted for Nader in '96 and '00, and I work in compensation consulting. That's why I know the exec comp repurcussions of this would be huge if passed as described.
Re: Re: Bush wants to end dividend tax Shareholders do not vote for / against executive compensation levels. Companies have to report it -- that's all. Shareholders also do not approve dividend payments. The only things that a shareholder can do are (a) limit or eliminate the issuance of new shares that would be used to make grants under the plan, and (b) vote out the directors that approve the execs' comp. Neither of those two things almost ever happen -- maybe 2-3 times in my professional history of eight years. A manipulation of this law to provide compensation tax-free can be done stealthily, and it will if this passes. Tax lawyers are smarter than legislators 90+% of the time.
Re: Re: Bush wants to end dividend tax People seem to be shocked by the idea that I am a hard-bred capitalist. I just think that there are more externalities and market failures than the typical libertarian does. Double taxation is silly. It increases beauracracy and keeps loophole-seeking tax lawyers in business. So, if we are going to eliminate the double tax and it's a choice between companies and high-wealth individuals getting the money, I'd rather the companies because for all their faults I think that the company is less likely to buy stupid crap like mink furs and Hummers with the extra cash.
No offense to Green party members. I just wanted to avoid the accusations of being some kind of radical leftist. Interest-bearing investments are generally discouraged because they are debt, not ownership. They are also less subject to manipulation that can be perpetrated by stockholders, because debt is issued with precisely articulated terms and dates. That is why you can't become wildly rich by investing in interest-bearing investments, but you can by owning a company. No dividend is exempt. Numbers 1 and 3 are only exempt because of their status as retirement accounts, thus all of their income and appreciation (dividends, capital gains, interest) are exempt. Although technically, funds in a 401K or pension account may have stemmed from corporate dividends, these funds are protected from taxation for the bigger purpose of providing retirement security. Number 2 (dividends received by mutual funds) are taxed. In fact, someone mentioned earlier that they are actually dividends from the mutual fund company, that is incorrect, these are your share of dividends received by the mutual fund on the investments it makes on your behalf, and you have to pay tax on them. Finally, for Number 4, US tax law requires foreigners to pay tax on dividends earned by a US company. Of course, there are numerous complications, as well as loopholes that foreigners try to take advantage of, but this is another matter entirely.
My understanding has been that the fund is not required to pass through all dividends earned, and things like expenses and fees can be taken out prior to a dividend is paid to you. Therefore, the dividends paid by the fund are not equal to the sum of dividends paid by the stocks in the fund. If I am wrong on that, I stand corrected.
Actually dividends are not an expense. They are earnings of a corporation that the corporation has decided to give to its owners. They are taxed precisely to encourage capital reinvestment and discourage cashing out without giving up ownership. Selling encourages the exchange of economic value. This is why capital gains are given preferential tax treatment. There are good reasons and a long history behind the evolution of double taxation. But primarily the effort has been to encourage capital reinvestment and reduce the negative economic impact of wealth retention by big corporate shareholders. From the executive comp standpoint, I would imagine one of the major concerns of this potential legislation would be balancing the interests of management versus shareholders, e.g. management would want to pay dividends to themselves as opposed to wages which are an expense, thereby potentially reporting profit even though there is no liquidity remaining for the shareholders.
So does this bring us back full circle then? Will people who invest in mutual funds benefit from the proposed dividend tax cut? Andy
To me this is still semantics. Anything that is not retained earnings can be considered the equivalent of an expense, whether it's given to employees via profit sharing or stockholders via a dividend. Agreed, but this is the irony of the Bush plan. By giving the tax credit to individuals, they are not encouraging reinvestment by companies because they haven't changed the company's tax structure. In fact, if investors call for more dividends, it discourages companies from making capital investments because they have lower retained earnings. The plan won't do what they say they want it to do. Interesting point. Note that 162(m) already limits the amount that companies can deduct from exec comp to $1 million (with multiple exceptions). Why not pay out all salary over $1 million as dividends if you're not going to get a tax deduction anyway? In this system the company's tax hit is the same as it was, but the executive gets a big chunk of tax-free money. By your definition above, paying all salary as dividends would actually improve the bottom line because it moves executive pay from an expense to a post-income stockholder distributions. Now sure, they lose that tax deduction on the salary expense up to $1 million, but do you really think that investors will notice?