The Dividend Double-Tax Deception -- The folly of eliminating taxes on dividends

MSN/Slate ^ | August 8, 2002, at 3:28 PM PT | Daniel Gross

[theFIRMbss]

The folly of eliminating taxes on dividends.

This week's harebrained proposal to rocket stocks back up to their late-'90s peaks: Cut or eliminate the taxes on corporate dividends.

Wall Street economist Henry Kaufman urged abolishing the tax in Wednesday's Wall Street Journal. Writing in the New York Observer on the same day, Nicholas von Hoffman said investors' moods would improve if stocks paid 5 percent dividends and that all that's needed to convince companies to start paying them is a "slight change in ... income-tax law?eliminating the tax on dividends to people with gross incomes of, say, $300,000 or less." And if Congress stopped its "double taxation" of dividends, James Glassman, the co-author of Dow 36,000, argued in the American Enterprise, "shareholder dividends would recover, and small investors would regain a powerful tool for separating real successes in business from the impostors."

[theFIRMbss]

People who embrace
irrationality, get
screwed by the maddness.

[rudypoot]

"Corporations are distinct entities. They are not merely passive conduits of cash. They are legal beings, chartered by states to perform certain objectives."

I thought they were supposed to turn profit? What the heck is this "conduits of cash" crap? Ever heard of "creation of wealth"?

And the crap about "corporations don't pay taxes"? Where do does this guy think the money comes from then? Thin air? What an idiot.

[anobjectivist]

Yes, speculation got us the great depression and our current situation.

However, how much government hand-holding do we need? Sure it would be nice if we had our president tell everyone to be intelligent with their investments, but should we continue to restrict a free market to a mixed one just in order to cushion the blow of stupidity?

If people don't have to think about investments in order to safely invest, they will never learn how to think about investing. If people never learn about really investing, then the associated churning between bull/bear market will be much more extreme and hard on everyone.

If you feed a domesticated dog food for its entire life from a food bowl and never let it go outside, will it be able to stay as fit and healthy as it is now if you let it free somewhere in the open? I doubt it would survive anywhere near as well as another dog that was brought up taking care of itself.

[Blood of Tyrants]

TROLL ALERT! Heaven forbid that PEOPLE should end up with money intended for the the government.

Cutting taxes it a good idea EVERY TIME.

The Rats want to give you $300. The Republicans want to give you a job.

[You Dirty Rats]

The author of this article totally misses the point. Interest payments on debt (bonds or bank loans) are deducted from income before corporate tax is levied. Therefore, dividends are taxed twice, but interest payments are only taxed once.

Effective 1/1/87, the capital gains rate was set roughly equal to marginal tax rates (Bradley - Gephardt tax bill). This widened the tax advantage of debt vs. equity. The result was a tremendous explosion of junk debt, LBOs, and takeovers relying on more debt, less equity. My own company at the time was hit by a hostile takeover; our management responded with a recap (repurchase shares by massive bank borrowings). We nearly ended up bankrupt when business turned down in the early 1990's. Sound familiar?

Eliminating double taxation of dividends will encourage more equity financing and less debt financing. Of course, if you are a Democrat that wants to see more bankruptcies and hardship so you can excoriate Dubya, then by all means oppose this.

The author also makes the idiotic argument that investors "clearly prefer capital gains". No sh*t, Sherlock, it's the double taxation of dividends that has caused this!!

But the most asinine point is his claim that eliminating this tax distortion represents "government action" that all of us free-market types normally oppose. Oh, please! Liberation is the opposite of tyranny!

Anyone the least bit familiar with Corporate Finance has knows for years that the double-taxation of dividends is a huge problem that needs to be fixed. Dubya deserves great credit for bringing this issue up in the face of the usual stupid knee-jerk Marxist Democratic arguments.

Remember the picture of our boys riding with the Afghans? Dubya is now riding on a big bull, leading a stampede of bulls that will ignite the stock market and trample the hopes of the dirty 'Rats in 2004!

[Drewman626]

This guy is definitely in the minority in my industry.

http://www.freerepublic.com/focus/news/817790/posts

A couple of points I'd make... One, the arguement between corporations and citizens as entities is an old one. The corner that guys like this run into is that if a Corporation is completely autonomous, then as an entity, how come it doesn't have representation in government? The counter-argument is that "the people that run the company can vote..."... back to square one.

In addition, this guys is forgeting that 51% of all Senior Citizens receives some form of dividend. He's also forgetting that if a company doesn't want to pay dividends, the shareholders must vote not to do so. He makes it sound like the company can screw its shareholders, but it's the shareholders that decide if a dividend is paid. He mentioned MircoSoft and Dell... people who buy MSFT and DELL know that those stocks typically do not pay dividends. It's not like it's a surprise.

This guy's argument is far from solid. There's also something to be said for corporate structure (s-corp, c-corp, LLP, etc) that I don't want to get into at the moment... but should be said eventually.

[Mr. Bird]

The companies that notched the most impressive performances of the decade—Dell, Microsoft, et al.—didn't pay dividends. Investors plainly prefer their returns in the form of capital gains. After all, since the 1997 capital gains tax cut, such gains are frequently taxed at a lower rate than dividends. Today, the S&P 500 has an indicated dividend yield of just 1.7 percent—down from 6.3 percent in 1982.

I think he just made the argument for slashing taxes on dividends, didn't he? Regardless of the supposed justifications and economic "stimulus" arguments, the bottom line is I support any effort which keeps money in the hands of people, vs. the government.

And I am not in a position to give a rat's ass what the Hiltons or anyone else does with their own money. And neither is the author.

[4CJ]

Cutting taxes it a good idea EVERY TIME.

Eliminating taxes is even better.

[Drewman626]

That's a great point. Anyone watch OReilly last night? The most common theme I'm seeing is this.

Bill: "everyone get's a tax cut under this plan. Everyone! That means a lot to a lot of people."

Guest: "But the rich get most of it"



Um... hang on... don't we teach our kids to not compare themselves to other people and just worry about their own lives? If someone give you $500, are you supposed to say "thank you" or "IT's not as much as he got!"

[ken5050]

You're spot on in your comments...yet there are a few short term distortions that will result from this long overdue move..simply because the financial markets never move smoothly..

1. Cost of municipal ( tax-exempt) borrowing will rise...simply because the rates have to be higher to compete....happily, this is occuring in a time of very low interest rates..

2. You'll see lots of financial re-engineering to "convert" debt to equity.....lots of bondholders will get whipsawed....

[wbill]

If someone give you $500, are you supposed to say "thank you" or "IT's not as much as he got!"

You forgot one thing.....democrats don't believe in politeness.

It's all about the class warfare. Remember the tax rebate of 2001? I actually had a former co-worker ask me if I received the full $300. When I said yes, she got mad....she only 'got' a little over a hundred. When I pointed out that the tax rebate was a percentage of the taxes paid, and I just happened to pay more taxes than she did......she just got even madder. She couldn't understand how 5% of the taxes I paid could possibly be more than 5% of the taxes she paid. The wonders of our government schooling.

[Gunslingr3]

Remember the picture of our boys riding with the Afghans? Dubya is now riding on a big bull, leading a stampede of bulls that will ignite the stock market and trample the hopes of the dirty 'Rats in 2004!

So you consider this market, at present valuation, to be a herd of bulls of preparing to stampede? Reality might well head you off at the pass, the liquidation and reallocation is not finished. Surely there are some stocks priced well, but the market is still historically high. Take a gander: S&P 500 P/E history

[Free the USA]

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