Corporate America Seeks to Elude the Taxman Through Special Dividends

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STEPHEN WILKES / Gallery Stock

Checkout counters at a Walmart in New Brunswick, N.J.

While the President and Congress have seemingly made little progress in reaching a compromise that would help the country avoid the fiscal cliff, corporate America isn’t sitting idly by. Parts of the fiscal cliff are tax increases to investment income like capital gains and dividend payments, and many firms are either speeding up regularly scheduled dividends or issuing unplanned dividends in order to help their shareholders avoid higher tax rates in the future.

The Bush tax cuts in 2003 lowered the top income-tax rate on qualified dividends by 15%. With the expiration of those tax rates and with the introduction of taxes associated with President Obama’s health care law, the top tax rate on dividends is set to rise to as high as 43% for high-income earners. In reaction to this possibility, firms like Costco, Dillards and, most recently, Dish Network have announced one-time payments to their shareholders in order to funnel profits to investors at a much lower tax rate, while companies like Walmart, Oracle and Walt Disney have pushed up the date of previously scheduled dividends. According to the financial-data firm Markit, U.S. firms are on pace to issue 134 special dividends in the fourth quarter of 2012, up from an average of 31 in previous years.

Perhaps unsurprisingly, of the firms that have issued special dividends so far this year, a disproportionate number of them have a heavy concentration of insider ownership. According to Chaitanya Gohil, vice president of Markit Dividend Research:

Many investors think that even if a grand bargain is struck in Washington, there is a good probability for dividends and capital tax rates to rise.  So, in cases where insider holdings are concentrated in the board and executive levels, there exists not only the incentive but also the capability to declare special dividends.

Critics of corporate America have for several years been disparaging large firms for sitting on hoards of cash. The record amounts of cash on corporate balance sheets, they say, could be better deployed by hiring workers or, at the very least, by funneling the money back to shareholders through dividends. As Matthew Yglesias of Slate wrote last week:

For a while now people have been wondering what, if anything, would get corporate cash “off the sidelines” and into the investment arena. But the special dividends path is an alternate way of doing it. Rather than investing the idle money, firms can disgorge it to their owners who’ll transform it into luxury durable goods (fancy cars) and residential investment (fancy houses) with the rising demand for those items — rather than corporate investment — being the demand driver.

So are these payments a sign that large firms are finally heeding this advice? Not necessarily. As Morningstar analyst Josh Peters wrote in a recent market commentary, special dividends aren’t a great service to investors or particularly bold moves for corporate managers to take, because they are one-off events. He argues that since these are one-time payouts, investors shouldn’t chase special dividends:

Long-term investors in companies that haven’t been paying acceptable regular dividends might end up slightly better off than before, and a few short-term traders could wind up with bigger tax bills, but the burst of activity seems unlikely to leave a lasting mark on the market except for this: These irregular dividends are yet another reminder of just how stingy most American corporations are when it comes to paying regular dividends.

And while it’s certainly better for corporations to return unused cash to its owners rather than have it sit idly in bank accounts, what the U.S. economy needs more than anything else is for its large firms to begin investing again through worker-hiring and other investments. Peters closes his commentary on these special dividends by quoting something Warren Buffett wrote to his clients back in 1965: “It is going to continue to be the policy of [Buffett Partnership Ltd.] to try to maximize investment gains, not minimize taxes. We will do our level best to create the maximum revenue for the Treasury — at the lowest rates the rules will allow.”

In other words, Warren Buffett thought the best way to make money was to find companies that were willing to take chances and invest in opportunities for extraordinary growth. But corporate America isn’t in a daring mood right now. According to a recent study completed by the Wall Street Journal, half of America’s largest publicly traded companies have recently announced plans to rein in capital expenditures next year. Whether you blame the federal government for creating an environment of uncertainty or you blame corporations for being far too risk averse, the bottom line is that business is not displaying the sort of audacity needed to help create a robust economic recovery. And these recent special dividends are just more evidence supporting this fact.

23 comments
SentientBeing
SentientBeing

“Make the lie big, make it simple, keep saying it, and eventually they will believe it.”― Adolf Hitler

Yes, Hitler was right. 

Soak The Rich is Big. Soak the Rich is Simple. They keep preaching it. And, many Americans, if not most, fully believe it. Most Americans agree on so-called 'Progressive' taxation. What they don't agree on is top rates, minimum rates, treatment of capital gains, what to exempt, what not to exempt, etc. 

But, in general, most Americans don't see anything wrong is Soaking The Rich. As a result, most Americans will only soak themselves. The Rich will keep getting rich.

Even in during Soviet Communism, Russia was the biggest importer of BMW's and Armani Suits in the world. People who will seek power will get it. The real questions are whether you as the common man, as an American, want a fair shot, in which case you can only get it with a classical liberal form of government and economic system. If you don't want a fair shot, any other system will do. The Soviet Union was probably the best system. The mechanism of acquisition was different, but the end result was the same. But, they became far more rigid than our system has ever been. The mass of the people lived on relative misery. The top 1/5th live like noblemen with their own semi-feudal, semi-industrial, totalitarian society.

http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets

SentientBeing
SentientBeing

"Make the lie big, make it simple, keep saying it, and eventually they will believe it." In short: Soak The Rich. The permanent imposition of a Federal Income Tax was justified with this imposition of 'fair' repression. 

1913 IRS RATES (All Categories were the same, however, in 1913 no taxes were actually collected):

1% $0.00 to $453,292.00

2% $453,292.00

3% $1,133,230.00

4% $1,699,846.00

5% $2,266,461.00

6% $5,666,152.00

7% $11,332,304.00

1918 IRS RATES

6% $0.00 to $ 4,000.00

etc.

77% $1,000,000.00 and over

2011 IRS RATES

10% $0.00 to $17,000.00

etc.

35% $379,150.00

This is all an extreme generalization. The tax code jumps all over the place since 1913. Yet, what is clear, even in the worst years for the richest Americans, is that the Tax Code is most efficient at fleecing the American middle class. Whether it is fair or not is irrelevant. It is just natural. 

The common man is a believer. He is trained to be dependent on others all his life. He's the perfect employee. 

But, the business owner, the investor, the manager, etc. has many opportunities to become psychologically independent. He is used to stress. He can deal with uncertainty. He learns to budget. He learns to avoid short-term thinking. He learns to think and act for himself. In short, he can still get fleeced unbeknownst during the short-term, but he adapts relatively easily. He is not static. He is creative. He does not lie to himself or allow the political demagogues, pollsters, or the news media, to tell him that manure is just a fine a smell as peaches.

What is natural about all this. The nature of work of business is uncertainty, doubt, insecurity. It requires insight, intuition, self-control. It requires common sense. Reason. Commitment.

The nature of being just a follower (the employee or the cog) leaves those skills--that would make that man far more successful than he dares dream--dormant within him.

roknsteve
roknsteve

If these multi-billion dollar companies can get away with this I think as a protest every tax payer in America should claim their dogs and cats on their returns.  They can't lock all of us up.  The only problem is that mostly conservatives would do it.  If the IRS is monitoring this-I'm just joking.

JohnDavidDeatherage
JohnDavidDeatherage

@roknsteve You think the owner's of these companies (shareholders) should not take advantage of today's lower tax rates but should intentionally pay more next year?  

When you shop and you see the same product in two different stores for different prices....  Do you pick the least expensive or more expensive.  Everything being equal, a rational person chooses to pay less.

Corporations (I hope) are managed by rational people....  They are choosing to issue dividends so they owners can pay less in taxes.....

roknsteve
roknsteve

You're just mad because 99% of Americans don't buy corporate fairy tales anymore.  And I won't be shopping at the Good Slaveship Walmart this Christmas.  And also if you were bright you would realize that capitalism is a primitive idea that has outlived it's usefullness.  And no I'm not a socialist, muslim, commie, zombie, etc.  I'm a 69 year old real American veteran.

roknsteve
roknsteve

Do all you conservatives have some regressive cave-man gene that makes you think it's wonderful for companies like Walmart to go around the world giving out million dollar bribes while paying slave wages?  And you think it was OK for Enron to steal all their employees retirement accounts?  That's the primitive I'm talking about. 

JohnDavidDeatherage
JohnDavidDeatherage

@roknsteve A primitive idea that's outlasted it's usefulness....  Russia and most of the former USSR are turning to capitalism, ditto China, even CUBA is relaxing the "State" and allowing capitalism.  

So you believe Capitalism is no longer useful.  What economic model should take it's place?

DonaldMcclure
DonaldMcclure

"The record amounts of cash on corporate balance sheets could be better deployed by hiring workers", who are the idiots that say this? Businesses are not in the business of hiring workers for the sake of adding payroll unless you are in the old Soviet Union. And of course we know how that business/collectivist philosophy worked out for the people, bankruptcy and extremely hard economic times. Business' business is making profits by creating goods and services that people want and doing it in as efficient low cost manner as possible, which means as low a labor cost factor as well. Anyone commenting on anything dealing with business or economics should have at least a speaking acquaintance with the business world and not just  a union member collecting a paycheck or a teacher who actually believes and teaches that everything should be given to everyone for free and that profits are a very,very naughty word. 

jason024
jason024

 Business' business is making profits by creating goods and services that people want and doing it in as efficient low cost manner as possible, which means as low a labor cost factor as well.

--------I am glad you get it. B/c many would argue that less regulation and union busting would lead to companies moving jobs back to America. Is is quite clear that no American can work for the amount of what many companies pay a third world worker. Unless of course they don't want to buy cheap made in Asia products anymore.

jason024
jason024 like.author.displayName 1 Like

@DonaldMcclure "The record amounts of cash on corporate balance sheets could be better deployed by hiring workers", who are the idiots that say this?

----

The GOP b/c clearly less taxes and more cash equal more jobs. Right?

Go Figure

JohnDavidDeatherage
JohnDavidDeatherage

@jason024 @DonaldMcclure I think you have a fundamental misunderstanding of business and economics.

1) managements primary job is to maximize shareholder / owner's wealth. 

2) jobs are a byproduct of trying to achieve shareholder wealth.

jason024
jason024

@JohnDavidDeatherage @jason024  That was not my point. I was answering to his question. The GOP asserts that just because the corporations get tax cuts they will hire more and invest in America. As you and Donald pointed out that is simply not true becasue they only will do so if it is in thier shareholders interest.

JohnDavidDeatherage
JohnDavidDeatherage

@roknsteve That's not my logic...  These principles are taught early in any business / finance / economics degree program.

roknsteve
roknsteve like.author.displayName 1 Like

JohnDavid, Following your logic soon the other 99% of us will be living at the river because the wealthy will have 99% of all money.  What's the difference between that and the feudal system in the year 1500?   

MikeFender
MikeFender like.author.displayName 1 Like

Some good points here but no change in the tax code is going to reverse the downward slide of the American economy. No amount of austerity is going to create the jobs that will be required to build a tax base. Globalization is forcing North American Labour to compete with the punitively low wages of places like Asia. Even if American could feed them selves working at globally competitive rates there would still be no tax base other than what could be extracted from corporations and the wealthy. That is just the way it is. So, what is the US government willing to do about it? So far nothing....

BobJan
BobJan like.author.displayName 1 Like

have them move to China.

roknsteve
roknsteve like.author.displayName like.author.displayName 2 Like

The chinese will polute themselves out of business sooner that you think.  Google it.

BobJan
BobJan

@roknsteve and the United States will spend itself out of business.

ViableOp
ViableOp

The issue of corporate taxation in the United States is reaching the critical point since the level of corporate taxation as a percentage of GDP has fallen to 50 year lows. As shown in this article, out of 280 Fortune 500 companies, 78 paid zero or less in federal taxes between 2008 and 2010:

http://viableopposition.blogspot.ca/2012/07/fun-and-games-with-corporate-taxes.html

It's business as usual in America.

JohnDavidDeatherage
JohnDavidDeatherage

@ViableOp help me understand why corporations should be taxed at all? Corporations' income is/are taxed and then any profit that is distributed to the owners is taxed again as dividend income.  Double taxation of the same income. Why is this fair?  Wouldn't it be better to not tax corporations and tax dividend income as ordinary income?  This will have the added benefit of American corporations relocating to US soil to avoid taxes overseas. (the reverse of what's happening now....)

JohnDavidDeatherage
JohnDavidDeatherage like.author.displayName 1 Like

Those darn corporations... behaving rationally in an irrational world.