Re: "Bush's Big Bang"
>>> A few observations:
>>> 1) It WILL disadvantage corporate and municipal bonds (interest rates on them, and even on federal debt, may have to rise to be competitive... raising the cost of borrowing for local and federal government), and REITs, vs. preferred stock. There will undoubtedly be a surge in preferred stock issuance instead of bonds.
>>> 2) It WILL lead to stockholder pressure on certain companies (ie, CSCO, MSFT, etc.) who are sitting on large cash balances and currently pay no dividends... to begin paying out some of that cash in dividends.
>>> 3) But this 'stockholder pressure' may continue to be resisted because:
The companies get no tax benefit if they pay out earnings in dividends... they may prefer to retain their earnings for R&D, acquisitions, and stock buy-backs (which they use to offset the stock dilution effects caused when stock options are exercised... which is STILL their preferred method of paying compensation as they don't have to expense it on their corporate balance sheets, and they get a TAX DEDUCTION when they issue the options.) It is still a FAR better deal financially for these companies to go with the tax deduction instead of paying dividends.
To summarize: their is NO FINANCIAL INCENTIVE for dividend payouts by many of these companies. There would have been a REAL BIG BANG EFFECT though if Bush had taken the correct road, and made earnings paid out in dividends by companies a TAX DEDUCTION to the companies. In other words: tax the dividends at the individual's level, but not at the corporate level... the exact opposite of what he chose to do.
Under the new rules, companies have a tax deduction for interest they pay on borrowed money (thus, creating an incentive for them to go into debt), but NO TAX INCENTIVE to pay dividends.
Until, and unless stock options are required to be expensed, companies who use a lot of options for compensation (even those sitting on a lot of cash) have no real financial incentive to pay dividends.
Bush fails Economics 101 on this one. It looks more important from a PR point-of-view, than from an economic one.
The WRONG way to go about a desirable goal.
This new plan helps the top individual income brackets (because of their disproportionate ownership of dividend-paying stocks outside of retirement accounts) but has very little stimulative effect on the economy, and does NOTHING for capital spending by corporations... which is the single largest weak point in our present day business conditions.
A "Shrub" of a tax change. Huge deficits in exchange for little stimulative help for the economy, no help at all to corporations, and a bonanza for Fat Cats. |
