|
Pre-Retirees and Dividends
The elimination of the double taxation of dividends is not only just, it is timely. Timely,
that is, in the big picture sense of helping aging baby boomers prepare for the time in their life when they have
to live off the results of their previous investment strategies. Under the current system, Businesses who make
a profit pay 35 percent of it in taxes. The remaining 65 percent is distributed to shareholders who then pay an
additional percentage based on their tax bracket. On balance, they may keep 30-40 cents per profit dollar while
the government gets 60-70 cents. Under the Bush proposal of this week, the shareholder would keep 65 percent of
the profits earned, the government taxing the amount once at the corporate level.
Social Security offers a real return in the range of 1-2 percent, money market funds in the 2-3 percent range and
the aggressive pursuit of capital gains has turned into $7 trillion in capital losses. An investment which may
return 3-5 percent in dividends and also appreciate at least at the level of inflation is a sign of changing circumstances
- the beginning of more limited earnings opportunities for the boomer cohort. It's time to think about living off
of earnings and not just the high risk pursuit of appreciation. As boomers age, their ability to replace capital
losses is rapidly diminishing.
Blue-collar or white-collar, ordinary Americans own stock. There are 85 million investors in either stocks or mutual
funds. Democrat pollster Mark Penn said recently that more voters own stock than have full-time jobs. Seniors make
up just 15 percent of all earned income but own 50 percent of all dividend income. Dividends make up a greater
percentage of senior income than capital gains or wages and are especially important at the lower end. The elderly
are disproportionately hurt by the current excessive taxation. Permanent tax relief is an essential component of
their financial security
Doing away with double taxation will create a difference in corporate governance more suitable to an aging population
as well. Cash dividends will be tax-free while the interest on corporate bonds will be taxed at the top earned
personal rate. Shareholders will keep 100 cents of each new dividend dollar but just 65 cents on each dollar of
interest earned from corporate bonds. Management will thereby be pressured to reduce the level of new debt in favor
of stock finance. The new rules will inhibit firms from over-borrowing and being tempted by debt-leveraged risk.
The failed conglomerate will be less likely. Empire-building desires will be countered by investor demands for
better returns. Unnecessary cash balances will be suspect. Credit worthiness as well as stock value will be more
a function of dividend yields than conflicted research reports. A dividend is not an estimate. A company with high
dividend payouts and low debt can be identified through public records without the intervention of a suspect analyst.
The move to eliminate double taxation of dividends may attract burned high risk investors back to the market, match
the coming needs of senior citizens, encourage cash-hording companies to stop sitting on their earnings and reduce
investor incentive to speculate in volatile stocks. Secondary effects will include the rising importance of yield
in calculating allocations among asset classes, a rising demand for sustainable earnings from companies, rising
dividends as more companies compete, an increase in management discipline to focus on earnings and not speculative
ventures and finally an incentive for companies to stick with what they know best.
Depending on the final language of the bill, corporations and investors alike may find renewed attraction for preferred
shares. Preferred shares raise investment capital as do corporate bonds. They generally pay a set dividend rate
but the dividend can be eliminated during bad times without fear of being forced into bankruptcy. Skipping a bond
interest payment generally leads to default. Under the Bush proposal preferred dividends would be tax-free, corporate
bond interest would not.
The value of the idea dividend tax relief is not a matter of much contention. Why has it never been considered
before? A Democrat Congressman, John Spratt summed it up this way. "We have had double taxation for about
90 years because we needed the money." Democrats are making three main arguments about the Bush plan in general:
(1) It will increase the deficit (2) It mainly helps the rich (3) It won't provide a stimulus.
Increased Deficits. When either party," says columnist Jim Pinkerton, "is reduced to talking about
deficits, that's a sign that they are on the wrong side of the larger issues."
For 50 years, he notes, from the 1930's to the 1970's the GOP owned the deficit issue and lost the elections. The
Republicans have become the party that mostly cuts taxes and mostly ignores deficits. Why? While voters oppose
deficits in theory, they like growth and jobs in reality. The debt has soared seven-fold since 1980 to $6.4 trillion
in an $11 trillion annual economy. The nation is infinitely better off.
Favors for the Wealthy. Begin with the fact that the downturn is not consumer driven but caused by slow
capital investments. It is only the investor class that invests. Low interest rates have kept the consumer in the
ballgame and will continue. However, the politics are even clearer. Pinkerton declares "The wealthy go to
the polls."
In the last Presidential election, less than one half (19.6 million) of those who make less than $35,000 a year
bothered to vote. About three-quarters (25.1 million) of those making more than $75,000 voted. Wealth rises with
age. About 42 percent of those under age 35 voted but 70 percent of those over 55 did.
Not a Stimulus Package. The Democrat plan calls for one-time rebates to their constituents, even non income
tax payers, in 2003. However, it leaves the electorate dangling in the election year 2004 so that they will favor
Democrats in order to get their next fix. The Republican plan is a long term and permanent growth plan which really
doesn't much kick in until 2004 but continues every year thereafter. What would boost the economy in 2003? The
elimination of uncertainty over the war on terrorism and lower-priced oil is far more important than a tiny tax
cut. Should the Iraq war cost a net $100 billion, it would represent one percent of GDP. That investment would
take precedence over a one-time tax rebate of about the same size.
Since the Bush proposal is many time larger that the Democrats, let's use it for comparison purposes. All told,
the Bush plan represents a very small 5.6 percent reduction in government revenue over ten years. In 1963, President
Kennedy proposed a 12.6 percent cut. In 1981, President Reagan proposed an 18.7 percent reduction of projected
revenues. Current CBO numbers still project a $5.6 trillion decade surplus on record federal revenues of $28.6
trillion.
That's $28,600,000,000,000.
|
