No, not a decrease in the *amount* of debt offerings (although that is posible, I suppose), but - through the effect of competition - a necessity for some debt to pay out higher yields... so some bond isues will be more expensive for the issuers (Munis, for instance).
Governors and localities are already starting to scream... some estimates have placed the 'hit' to them in '03 at 60 - 80 Billion dollars (pretty vague, I know, but the calculators are already humming).
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For a deeper look, see:
Message 18420063
Bonds WILL be negatively affected because of the back-asswards way they went about tax relief for dividends (they should have made all dividend payouts a tax deduction TO THE CORPORATION... just as interest payments on debt are now), but the negative effect on bonds will be less than some have claimed.
I'll explain below.
(Note: New clarification of the Bush proposal today put out by the Treasury Department indicates what a confusing muck-up of the tax code it is [as opposed to the clean choice that making corporate earnings paid out in dividends tax deductible to the corporations would have been].
As the Treasury explanation notes, DIVS WILL ONLY BE TAX FREE IF THE COMPANY PAID FEDERAL TAXES THAT YEAR!
AND, IF THE COMPANY CHOOSES TO RETAIN THE DIVS - INSTEAD OF PAYING THEM OUT - they must put the money in a special corporate account. Shareholders must be notified of this. Then, if the shareholder sells his shares, his capital gains basis is reduced by the amount of the 'retained dividends'.
More confusing paperwork. More work for accountants. A more convoluted and complicated tax code... and little incentive for companies to pay more in dividends - since they get no tax deduction like they do for interest debt.)
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Message 18416185
Re: "This economic neutrality could be achieved in a number of ways.[2] For example, corporations could be allowed to deduct dividend payments from their taxes (just as they do with interest payments)"
>>> That would have been the ideal way to eliminate the double taxation.
>>> Too bad Bush didn't choose to do it... and instead went with his weak and conflicted method.
>>> Under the wrong-headed Bush proposal:
>>> The tax code incentive encouraging corporate debt remains unbalanced (interest on debt is tax deductible, but dividend payments are not.) This encourages debt, as opposed to internally generated earnings, and heightens bankrupcy risks.
>>> Corps have only a little more incentive to pay dividends, since they are not deductible.
>>> Corps which traditionally played the stock watering game by relying upon stock options for significant portions of their compensation payments... will still do so as long as accountings regs are not reformed to require the expensing of stock options... the companies get a tax write-off for their stock option grants, but no deduction for dividend payments.
>>> They get a deduction for debt interest payments, they get a deduction for options grants (and don't have to declare them as an expense against earnings!), but dividend payouts to the stockholders are not deductible.
>>> Dividends paid into retirement accounts will still be taxed when they come out... but dividends paid into regular accounts are not, so retirement accounts are disadvantaged.
>>> Muni bonds and REITs will take a hit (since they are still taxable), and federal bonds, and interest rates on all must rise to compete with dividend paying tax-free stocks.
>>> Far better for Bush to have taken the rational approach and made dividend payouts deductible for the corporations - thus equal to the interest deduction in the eyes of the federal code... leveling the playing field with debt. If that hit federal revenue too hard, he could have removed corporate loopholes from the code. Corporations across the board would have raised dividend payouts, stocks would strongly rebound, retirement plans would not be disadvantaged, and economic incentives for earnings-led growth would have been much better.
>>> A wasted opportunity, and all for flimsy political calculations: he thought that because of the recent corporate scandals he couldn't be seen doing them any 'favors'.
>>> Short-sighted. Wasted opportunity. All Rove sees is politics... not economics.
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Message 18415993
Re: "Bush's Big Bang"
The WRONG way to go about a desirable goal (ending double taxation of dividends).
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 counter-productive and unnecessarily complicated 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 who have more money outside of retirement plans.
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.
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Message 18416085
Few Officials at Companies Expect Surge in Dividends
By DAVID LEONHARDT and CLAUDIA H. DEUTSCH
January 8, 2003
nytimes.com.
"It would have made more sense to eliminate the corporate tax on dividends and thus treat interest and dividends the same way," said Paul A. Gompers, a finance professor at Harvard Business School. Under the proposal, "the tax code still encourages corporations to take on too much debt."
Indeed, some Wall Street executives questioned whether the plan would cause enough of a change to affect stocks significantly.
"Nothing in this economic package is a magic bullet that will get me to reconstruct my portfolio," said Anthony M. Maramarco, a managing director at David L. Babson & Company, an investment firm. "And anyone who thinks that it will make dividend-paying stocks soar is practicing voodoo dividend-nomics." |
