January 08, 2003
From the desk of Mindles H. Dreck:More Details on Dividend Taxation
Oops. major clarification to the dividend tax relief:
But the plan also is structured to give shareholders a potential tax break on profits even when a company retains or reinvests them in the business, Treasury officials said.Here's how that part of the plan works: For every $1 a company retains as earnings instead of paying it out as dividends, a shareholder would be allowed to exclude $1 per share from his taxable gain at the time the share is resold.
The purpose of the plan, Treasury officials said, is to prevent the pendulum from shifting too far in favor of dividends, and forcing companies to pay out dividends when they would prefer to reinvest the money.
"What we're trying to do is get rid of the bias against dividends," said Assistant Treasury Secretary Pam Olson. But at the same time, administration officials "don't want to create a bias" that pressures companies to pay dividends when they shouldn't.
Treasury officials said the change for retained earnings actually reduces the cost of the dividend plan as a whole, estimated at $364 billion over 10 years, by about $40 billion. It does so by eliminating some incentives companies would have had to game the new system, Ms. Olson said.
It'll be a while before the market sorts this out. This would seem to result in a heavier taxation of stocks that have multiple-expansion potential compared to others. Posted by Mindles H. Dreck at January 8, 2003 02:52 PM | TrackBack | Technorati inbound links
Am I missing something, or is this not an absolute heavenly dream for the accounting industry, and an absolute nightmare for the stockholding and tax-calculating public? So when stock is sold, one will now also factor in the amount of retained earnings for the firm during that time the stock was held? By God, these dolts will convince me as to the wisdom of anarchism yet!
Posted by: Will Allen on January 8, 2003 03:11 PMSome of that, of course, but I think probably corporations will just issue statements like the ones you get from your bank.
Posted by: Jane Galt on January 8, 2003 03:19 PMYeah, just another layer of bookeeping added to what exists, as if there wasn't enough of that already gumming things up. There are few things as stupid or immoral as the tax code, as currently constituted. Gee whiz, a fella might just become a bit cynical about the whole thing!
Posted by: Will Allen on January 8, 2003 03:29 PMI think it could be a horrendous compliance problem. It could be particularly ugly for minority holders of closely-held C corporations, who often receive no dividends. They will have to somehow convince the corporation to generate the information for them, or convince the corporation to provide the tax returns and shareholder records to enable the shareholder to determine basis.
The goal of avoiding double taxation is laudable, but this is a wonderful idea in theory that may be a compliance nightmare in practice.
Posted by: Joe Kristan on January 8, 2003 05:55 PMWelcome to the wonderful world of Advance Corporation Tax! The next step is when some companies complain about the tax they pay in repatriating earnings from foreign subsidiaries, by the way.
The reform of dividend taxation always resembles the old woman who swallowed a fly ...
Posted by: dsquared on January 8, 2003 06:37 PMDo become cynical, Will. Feel the power of the dark side.
I wonder if this idea is just a negotiating position? It's stupid complex enough that even Republicans must see how dumb it is.
Let's call this plan by its true name: The Taxes of Evil
A troika of nasty taxes George Bush and friends do not like:
Corporate income tax
Dividend tax
and the WWD (weapon of worth destruction) the Death tax
Regarding the accounting nightmare, it's not so bad for private companies. This just puts C corporations in the same situation that S corporations (and partnerships, etc.) have always been in -- taxed retained earnings are added to basis, which means they can be realized by the owner (through dividend distributions or sales of shares) without being taxed again. S corps have always been happy to live with that -- it's the main reason for being an S corp, single taxation. For the two million-odd private C corps out there this will be quite nice, and help put them on a more level playing filed with S corps, LLCs and the rest.
For public corps with traded stock, if they are talking about figuring the earnings retained between the time one bought shares on Monday and sold them on Thursday, that would be another matter. But, hey, big public companies can pay somebody to keep track of that for them, like Andersen maybe. No, wait... I haven't read the details of the proposal, maybe they'll do like mutual funds do and credit shareholders with their gains once a year.
Overall, this is a step towards equalizing the tax treatment between C corps and all other business entities (S corps and the rest) none of which pay entity-level income taxes. As there wouldn't seem to be any good reason for imposing double taxation on a business just because of its form of legal organization, and as most C corps are stuck as they are just because the other options weren't available when they were set up (hardly anyone uses a C corp for a new business today) it seems like a reasonable and practical enough idea to me.
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