Asymmetrical Information

Ooo! That gets investers a whopping 0.3% annual yield.

Assuming that the president's tax plan is passed, that $0.16 annual dividend means that Bill Gates gets to write himself a check for $97.8 million.

It's a good gig if you can get it.

No, it's a good gig if you can start a company from scrathc and turn it into one of the biggest corporations the world has ever seen.

So Microsoft's now mature enough to start paying dividends? That's as good of a sign as any that the computer industry has matured.

If memory serves. Bill Gates has for years sold about 100 million worth of stock each year to finance his lifestyle and charities.

So, what a coincidence, it turns out that at 16 cents a share (a measly return of about 0.3%), Gates will net around 97 million dollars. So it looks like he can skip his usual sale of shares.

But even better, if the Bush dividend plan passes. Gates will get a 38 million dollar tax break, courtesy of one GWB.

Sucks to be rich.

Oh please. Do you really think Bill Gates, a man who has said he won't leave money to his kids and who tries to give it away as fast as he can get it (literally, and don't tell me it's all because of the tax burden) really gives out a stock dividend so he doesn't have to cash stock out himself?

I suspect there are other reasons for doing the split and dividend which have nothing to do with Mr. Gates' personal fortune. When you've got 20 billion dollars (or what ever it is this week) 100 million is juct pocket change.

Microsoft is notorious for going after school districts that use his products without paying for them, even though they couldn't have afforded them in the first place. His charitable work is a cover for behavior that would put a a pirate on the Spanish main to shame. He freed up 1.7% of his cash reserves to go to himself and his investors. Big whoop!

Bill Gates buys some code from somebody in a voluntary transaction, proceeds to out-negotiate the dominant technology firm of the time, which was denounced in the same way that Gates' company is now, and then uses admittedly hardball tactics, along with developing a product that countless people do like to use, to build an extremely successful company. Yeah, I guess that makes him Evil Incarnate. If you wanna get rich, as opposed to griping about other people being rich, I suggest that if you apply yourself half as effectively or persistently as Gates did, within five years you'll have improved your material well-being by an extraordinairy amount. Will it be worth it? It depends on what you consider worthwhile, in terms of sacrifices, in order to get a lot wealthier. There have been times in my life when I've made a lot of money, and times whan I haven't made much at all, and it usually tracked with with how badly I wanted to make money at the time. Gates likely was not concentrated excessively on money, otherwise he likely would have taken the Paul Allen track some time ago. Gates has likely been primarily focused on building the most dominant comapny that he could, and has largely succeeded in that task. This makes him evil? To suggest that a 38 million dollar tax break is a motivater to someone worth in excess of 20 billion dollars is indicative of a failure to appreciate the size of truly large numbers, and their relationship to much smaller numbers.

Unless Mickey Kaus is more right than anyone thought with the "faster thesis" stuff, I doubt that the dividend was prompted by the tax cut announcement. I'll suspect its more of a post bubble look at what the company is and does. I don't get the feeling that Microsoft is in the business of knee jerk reaction to government incentives, particularly ones that are currently imaginary.

Moreover, if you read the fine print on the Bush corporate dividend proposal, you'll find that Gates et al would have gotten a tax break either way. For companies that reinvest dividends, the administration is proposing that the per share value of reinvestment be added to the purchase price when computing the tax value of the capital gain. In that case (and we're putting a big cart before the horse -'cos nothing has passed the Congress at all) when Gates sold the shares, he'd still not be paying taxes on those sixteen cents.

Uh, Ed I think you need to redo that math. If he had sold stock he would have gotten a 16c per share improvement in basis for purpose of calculating his capital gains tax. Share price is currently $52, and his basis for that stock is essentially 0, so he would have saved about 20% of $3000.

So Bill's options for compensation will be:

Big assed salary - pay the max in income taxes plus FICA etc. Total tax rate is pushing 50%.

Sell some Stock - pay long-term capital gains taxes (20% if I remember correctly?) - some fraction of a percent retained-earnings credit.

Announce a dividend - pay no taxes.

Of course, other people come along for the ride if he announces a dividend. But the top 10 owners of MSFT own well more than half of the stock, and I think the can all agree to give the peons some 0.3% dividend in return for them never having to pay income tax again.

I think provides us a graphic example of why having no taxes on dividends is a heroicly bad idea.

Anyone who is self-employed, or the dominant owner of a company will be able to move all or most of his compensation from its current form into dividends and avoid paying taxes alltogether.

Once the market has time to adjust to this new loophole, I think we can expect the wealthy and self-employed to essentially stop paying taxes alltogether.

I'm no tax lawyer, but perhaps Jane will enlighten us as to why this isn't going to happen.

Why, yes I can. You've forgotten the corporate tax.

Corporations currently pay taxes at 35% on their profits, plus any local and state taxes, which in New York City run around 12% extra. Salaries and interest on debt are tax deductible, while dividends aren't. So while this is going to be a preferred treatment relative to capital gains, it will be a non-preferred tax treatment to salary if you are the majority shareholder of the company, since personal income tax rates are dropping below that of the corporation. It wouldn't make any sense to plow your money into a corporation and then pay yourself a dividend; any profit you earned would be subject to a 35% tax before you touched it.

There are corporate forms which don't pay the corporate income tax, but they also don't qualify for the special dividend treatment. So rich people, although they dodge a lot of tax, are not going to get out of paying the stuff entirely. It will still be better for a rich person to own something in their own right, and take dividends and capital gains, than to funnel it into a corporation.

Then it becomes a way to pay corporate mangers, rather than owners: give an executive a large number of shares with an explicit contract provision requiring him to return the shares upon termination of employment. The dividends are his pay.

That would probably be a good way to compensate executives who don't sit on the company board.

Anthony, that still won't help them. If the objective is to get $X into the employees' hands after tax and the corporate rate is higher than the personal rate (and I believe that Jane indicated in an earlier post that it was or soon will be) then it is still cheaper for the corporation to pay the money as salary and get the corporate tax deduction than it would be to pay the net amount as dividends.

It's really the identical situation if you're the majority shareholder or just hold a few pref. shares.

This is what I was talking about in my post. I don't think it makes sense from a hardball business point of view, because as this article points out, it can end up driving a section of the consumer base away from MS. It reminds me of the French diplomat Talleyrand's reaction to a piece of bad news: "A crime? It's worse than a crime, it's a blunder."

If memory serves, for quite a while Microsoft wasn't paying any federal taxes due to getting huge tax deductions when their employees exercised stock options. If this still holds, the dividends from Microsoft WILL be taxed under the President's proposal, which requires companies to pay taxes on their income.

Using Jane's analysis of who is paying what taxes on Bill Gates's dividends and their associated corporate income, can anyone tell me why the reform gave the tax deduction to individual taxpayers rather than letting corporations simply deduct the dividends like they do interest payments? Sounds more direct to me, and it achieves the same reform goal: ending double taxation.

BTW, giving the corporation the deduction and keeping individuals paying income taxes on all of their income also doesn't give Bill Gates an artificial reason to favor dividend yields over interest yields.

Tom,

From what I heard, the Administration considered that option, but decided it would sound too much like a tax-cut for corporations and felt it would be an easier sell to do it as a tax-cut for individuals.

Manish: Makes political sense, but as you point out, hasn't much to do with good policy or economics.

Didnt you know Microsoft is a pyramid scheme?

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