http://story.news.yahoo.com/news?tm...514&e=1&u=/ap/20030106/ap_on_go_pr_wh/bush_37 On first (well, maybe second) glance, I'm not too crazy about this idea. I'll let everyone else debate the merits/pitfalls of taking this much tax out of the treasury. Personally, I'm somewhat of a Darwinian ******* who thinks we're taxed too much, and we provide too much welfare. Too me, for every one person it helps, it gives nine other an incentive to be lazy....but I digress... Anyway, my problem with this is what it will do to the economy. At first, it will encourage people to pour money back into the market. That's not really a bad thing. The bad thing to me is that it will put great pressure on companies to produce dividends. That means less money to be reinvested in the companies themselves as the earnings will be going out the door in the form of dividends. I don't see how this could be a good thing (long term) for the economy. Of course, it could be argued that the companies who give the best dividends will attract the most dollars. Therefore, their share value will increase relative to their "dividend appeal." So you put in a few extra bucks on the inflated value, but it comes back in the form of tax free dividends. Am I seeing this right? I only have a few brain cells left; what are they missing?
I'm a bit time W supporter, but this will never pass. Yes it encourages people to save, but this would benefit mainly the people who still have a lot of cash left to invest. A better idea, IMO, would be to increase thresholds for 401Ks (curently $12,000 in 2003), Roth IRA's ($3000 in 2003) or traditional or SEP IRAs. This accomplishes 2 things, it allows people to save for retirement and it puts more long term money in the market. Again maybe I'm wrong but I think W made a huge mistake in proposing this.
From the New York Times- Administration officials are hoping that a full elimination of taxes on the dividends that shareholders are paid by corporations will give the stock market a powerful lift and shore up confidence. The decision was first reported by Time magazine's online edition. R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, has suggested that the move could lift stock prices by 20 percent. Even enthusiastic supporters were surprised by Mr. Bush's plan. "I am surprised and happy," said Kevin Hasset, an economist at the American Enterprise Institute, a conservative research group here. "This will provide a lot of juice to the market." But many economists said they were dubious about the impact on either business investment or consumer spending. The proposal would give shareholders more money, but probably not until they submitted their taxes in 2004. And corporations would not save any tax money. Partly for those reasons, business groups have not pushed for lower taxes on dividends. But now, faced with Mr. Bush's determination, business lobbyists say they are behind him. "The animal spirits of business have been depressed," said Jerry Jasinowski, president of the National Association of Manufacturers. "There is no question but that the impact of this on confidence will be immediate. The first thing that chief executives do when they get up in the morning is check the price of their stock."
hasn't this already been done??? i think it changes for this year...he also increased the cap on education iras
I just don't get the timing. The vast majority of Americans think a tax cut right now is a bad idea. We are about to go into a war that could cost between $60 and $100 billion. Nevermind that, according to an independant study of the proposal by a lower tax advocacy group, 64 percent of these taxes would benefit the wealthiest 5 percent of Americans. This is bizarre policy at a really bad time.
HALLELUJAH! HALLELUJAH! While the realist in me sees this as a negotiating stance and that the likely outcome will be around a 50% decrease in dividend taxation, the economist in me is OVERJOYED!!!! Pole -- In terms of pure financial theory, Nobel Prize winners Modigliani and Miller proved that all things being equal, a stock's value is independent of its dividend policy. Assuming taxes on dividends are removed, this theory should prove true. Think of it this way, either you can allow the company to invest the money for you, or you can invest it yourself if it is dividended to you. Assuming both of you have the same investment alternatives, then it doesn't matter who does the investing. I think we'll see the following effects on the economy as a result of this plan: 1) Companies increasing their dividend -- This will help guard against corporate mismanagement of free cash flow and will guard against stockpiling cash hoards (see Microsoft, Oracle, Cisco). 2) Companies will reduce stock buyback plans in favor of paying dividends -- With no tax on dividends and an existing tax on capital gains, it no longer makes sense from a tax perspective to return $$ to shareholders in the form of a share repurchase plan. 3) More tangible stock valuations -- Again, in terms of pure financial theory, a stock price is equal to the discounted present value of its future expected dividends. When you have a stock that pays no dividends, valuation of share price becomes largely a theoretical exercise. With more companies now opting to pay dividends, valuations should become more transparent. This should lead to greater investor confidence and higher share prices. 4) Greater access to capital for businesses -- Higher share prices which will result from this policy will allow companies to return to the equity market to raise cash. This will increase economic efficiency by channelling $$ to its most productive source. 5) More companies paying dividends -- An obvious response to an advantageous tax system -- this should put more money in consumers hands, thus generating a multiplier effect. Again, I think there will be some political horse trading taking place, as no doubt there will be the liberal lunatic fringe-types (ie Nancy Pelosi) claiming that this plan only benefits the wealthy. From an economic standpoint, this is utter nonsense, but clearly this form of demagoguery will appeal to the non-rational emotional types. I might add that Bush's current plan also includes a $400 rebate to middle-class parents, most likely an extension of unemployment benefits, and accelerated tax cuts. The Bush Administration is making a good faith effort at improving our current economic situation. I applaud him for taking action.
Absolutely, TJ is smarter than me. I love to read his posts, because they are so thorough. Even if you don't agree with the guy, you have to admire his mind.
I like the idea. It puts the onus on corporations to produce transparent earnings, and makes valuation much simpler. Companies should pay a reasonable dividend - avoiding it more often leads to irresponsible capital expense (write-offs) and cash hoards, as TJ mentioned.
Good idea, in my opinion. Right now, there's a disadvantage to a corporation paying out dividends that will be eliminated here. Unfortunately, it does primarily benefit those wealthy enough to own stocks, so it really doesn't address the short-term needs of the economy - propping up the lower classes. The middle & upper classes are doing relatively OK in this recession. Nevertheless, I don't think there's anything inherently bad about the idea.
Personally, I think we would be better served by eliminating capital gains tax on investments this year. It would compel people to invest in projects. Additionally, I would allow acceleration of depreciation expense, again compelling investment. If I take your Cisco/MSFT example, if they had any intention of sending cash to shareholders, wouldn't they have been repurchasing shares? I don't think this compels them to dividend the cash out as it does not provide them an economic incentive to create a dividend. Going forward, I agree these companies would dividend the cash out rather than repurchase b/c of the tax benefit. On point 3, tangible stock valuations wouldn't really be affected by the mere presence of dividends as sophisticated investors would be looking at the cashflows of the business anyway. On point 4, I think you can accomplish that through a brighter economic outlook, which can be accomplished by a variety of different options, so I don't know if that ones a big deal. Overall, as an economic stimulus, it will result in additional dollars in the hands of consumers. I don't know what the balance of the $600B comes from this particular cut. I would like to see A LOT of incentives to invest, not just in the stock market, but in capital projects, businesses, etc. My guess is the economy recovers just fine with/without the stimulus because people generally underestimate the impact of lower interest rates. Just ask anyone who has refinanced their home. Better yet, ask anyone who has refinanced their business, particularly if its commericial real estate.
How many people do you know who are paying capital gains taxes this year? In case you missed it, the market is down huge and the majority of people have capital loss, not gain. Relieving the tax burden on dividends is a much more predictable benefit. Companies are very reluctant to lower their dividend, even in bad times. As a result, eliminating a tax on dividends proves a much more predictable benefit to shareholders than does eliminating the capital gains tax. I'm not exactly clear on the link you draw between capital gains taxes and incentive to invest in projects. The way I look at it, companies will be hesitant to engage in capital spending until they have abundant access to capital. The equity market is essentially closed right now due to depressed share prices, and the credit market is very tight after all the banks got burned in Argentina, power companies, and telco's. Eliminating the tax on dividends will help share prices, thus providing access to equity capital. This will encourage investment in capital projects. Agreed. Repurchasing shares is currently a more efficient way to return cash to shareholders, but it is still going to be taxed in the form of capital gains. By eliminating the tax on dividends, companies can return cash to shareholders without triggering any tax consequences at the individual level. This is compelling. If a stock trades at 10x earnings, its equity cost of capital is around 10%. Unless they can find projects with rates of return higher than 10%, they are better off sending that money back to shareholders. It is highly unlikely that companies sitting on cash piles right now can find projects with IRR's greater than their cost of capital. If that is the case, they should dividend the cash to investors. The new tax plan encourages this. There are different types of investors and multiple ways of valuing a business. A retirement age investor would seek out regular income, in the form of dividends. This is a yield-oriented investor. He would love the new tax strategy. A value-oriented investor may use the multiples method of valuation. He would look at what multiple of cash flow a business trades at. He would be largely indifferent to the changes in tax laws, since his analysis is independent of how a company uses it's free cash. A good investor will always check to see if a company is investing its cash in a manner which yields returns greater than its cost of capital. As I pointed out above, this new tax policy encourages this behavior. Reducing a tax on dividends provides a "brighter economic outlook". What is your point.
How many people do you know who are paying capital gains taxes this year? In case you missed it, the market is down huge and the majority of people have capital loss, not gain. Relieving the tax burden on dividends is a much more predictable benefit. Reducing / eliminating taxes on dividends really isn't going to stimulate anything short-term. Nor are incentives to business. Business aren't going to suddenly start hiring new people unless there is demand for their products. That demand is only going to be created by injecting the lower/middle classes. Another thing to do for the middle class is to eliminate the $3000 restriction on capital losses deductions. Let people claim more in capital losses this year and it will inject a huge amount of money short-term into the economy without costing anything in the long-run since those losses would have been taken at some point down the road anyway. This can be done retroactively for Year 2002 to provide immediate benefits. Bush's ideas are not bad long-term but they do nothing for the short-term economy.
Leave it to Jeff and Major to make the most cogent posts on this thread. The economy needs a temporary stimulus to get it going again and W proposes a permanent tax cut for the wealthy. What is wrong with this picture?
Major -- You yourself have insisted that the biggest problem with the economy right now is investor/consumer confidence. The market reacted *extremely* favorably today to Bush's plan. Should stock prices continue to rise, investor confidence will be restored, as 401(k) plans increase in value and paper wealth is created. It will also provide companies with access to capital, as I've outline above. This will allow increased investment, and job creation will result. With stock prices going up and job creation going up, consumer confidence should skyrocket. Consumer spending represents 66% of GDP. When consumer spending goes up, the economy improves. Don't forget about the other components of Bush's plan -- the $400 rebate to middle class parents and the extension of unemployment benefits. This should provide additional short-term relief. No plan will solve the economic problems overnight. It is better to exercise sound financial and economic judgment than a temporary quick fix -- which what the Dems are pushing with their public works projects. This is classic Keynesian theory whereby private sector investment is crowded out by public sector waste. I agree with you on the extension of capital loss carry-forwards. I would love to have that plus accelerated depreciation allowances built into the plan, but as you can certainly recognize, the liberal left would never pass a bill that reduced tax revenues so drastically (despite sound economic reasons to do so).
