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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: elmatador who wrote (27196)1/9/2003 2:09:51 PM
From: Moominoid   of 74559
 
I read the article in the NYT today on the Bush "dividend tax" plan. It's not really a dividend tax plan at all if they are right but something more complex that has some similarities to Australia's franking credit system but may actually be better in a couple of areas:

1. The tax credits apply to both dividends and non-distributed profits up to the amount on which the regular rate US federal corporation tax has been paid. Australia only allows dividends introducing a distortion.

2. Where a dividend is distributed then it is tax free. In Australia the tax credit attached helps offset the personal income tax due which can be higher (use of leverage results in surplus tax credits that can help reduce tax due on other income in Australia).

3. When the profits are reinvested the "deemed dividend" is used to adjust the capital gains tax cost basis. So CGT is only payable on trading profits in excess of the profits actually made by the company.

4. If the federal corporation tax is lower than your personal tax rate it pays to incorporate to reduce taxes even if all profits are paid out as dividends to partners and or proprietors. This isn't true under the Australian franking credit system.

5. People dreaming about MSFT distributing its cash are wrong. That wouldn't be tax free as it was earned before 2002 and under deemed dividends there is in fact no advantage to paying out the tax.

6. I am thinking that mutual funds should be able to pass on these tax benefits as tax free dividends and cost adjusted smaller capital gains. Retirement funds would have a harder time with this in the US system (in Australia earnings of retirement funds are taxed immediately only the contributions have a tax beneficial status).

David
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