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Who Gains From No Tax
on Dividends?
It was vintage George W. Bush: the big, bold stroke, designed to sweep
away a perceived inequity -- and yes, to help a few of his friends -- all
in the name of ending our economic doldrums.
The proposal to end the taxation on dividends has a rationale -- sort of.
More important, it has influential constituencies -- Wall Street,
corporations, big investors.
What it doesn't have, at least not yet, is a sense that someone has
thought through all the implications.
While it may not sound earth-shattering to tech investors who report a few
dozen dollars every year in dividends, the proposal could dramatically
reshape how markets and companies work. Of course, there's still much
compromising to do. But let me point to three areas where problems arise:
LIFE AT THE TOP: Say you're Larry Ellison. As of the last proxy
report, you own nearly 1.4 billion shares of Oracle (ORCL), which finished
Tuesday at $12.69 a share.
Say you're tired of paying capital-gains taxes. Presto! The Bush proposal
has created an alternative for you: If you set up a yearly dividend of,
let's say, 20 cents a share, you can take home a tax-free $280 million in
dividends alone.
Now Ellison may decide not to do this -- he's rich enough -- though Oracle
said Tuesday it would consider paying a dividend. There are plenty of
cultural taboos in tech against dividends.
But Bush's plan sets up a new and not particularly imaginative incentive
for founders who own big stakes in cash-rich companies. The question: Will
they someday decide to milk their companies for tax-free dividend income?
After all, it's less expensive than paying capital gains.
``You might as well take out the money in dividends,'' says San Francisco
educator and trader Harvey Baraban. ``It beats selling your company.''
WHO BENEFITS: One odd twist to the president's plan is that it
applies only to equities held in taxable accounts. Most Americans,
however, have their stocks in a retirement account like a 401(k) -- and
the Bush plan doesn't help them. They'll still be liable for taxes when
they withdraw that money later.
This naturally points to a question of fairness: The people who own the
bulk of stocks in taxable accounts -- who would benefit -- are generally
big institutions or large investors, not ordinary investors.
Bloomberg News reported that President Bush, for instance, would have
saved $17,000 on the $43,805 he received in dividends in 2001. Vice
President Dick Cheney would have saved $107,000 on his dividend bill.
``This does a lot for old money,'' says columnist Robert Pastore, a
certified public accountant and the author of a book on stock options.
``But it doesn't do much for Joe Worker.''
(Pastore's answer, incidentally, is to allow the corporation to deduct
what it pays in dividends on its corporate tax return -- thus treating all
stock the same.)
GROWTH: Unquestionably, the president's plan is good for Wall
Street firms. It will allow them to sell all sorts of preferred stock,
which behaves a little like a bond without the same backing.
But it's questionable whether exempting dividends from taxes will really
promote the kind of growth in capital spending that's needed to revive the
economy. Yes, we're all more risk-averse these days. But if a company is
paying out much more in dividends, will it reduce the cash left for
investments that put people to work? The answer feels like yes.
Source:
SiliconeValley.Com
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