Thursday, December 6, 2012

Dividends and the Fiscal Cliff

It is uncertain whether the tax on dividends is going to go up next year.  It may rise to the rate of ordinary income and it may not.  I've noticed that several companies, for instance, Smith & Wesson, have issued fairly large special dividends at the end of this year, perhaps to get them under the wire of any change in taxation.  It would probably be a good idea, from a shareholder value perspective, for some companies to pay their 2013 dividends early---in the same manner that individual taxpayers will sometimes cluster deductible expenses right at the end of a tax year that would normally occur over the course of two tax years.  I wonder if we'll see any of that as it becomes clearer that we will or we will not see a significant change in the taxation of dividends.

Increasing the dividend tax rate will likely drive companies more towards stock buybacks, which IMO are not really a good thing, because they are so often misused.  Considering that the agents typically have large numbers of stock options themselves, a little imagination will tell you whether stock buybacks are typically exercised when the stock is cheap versus when it is expensive.  Frequently they're also used merely to cover for the dilution caused by the issuance of said options.  Because of the incentive alignment problem, I'm not in favor of stock options in general at the highest decision making levels of publicly traded companies.

1 comment:

Felipe Monteiro de Carvalho said...

Wow! The world is getting crazy. In Brazil we are ruled by ex-terrorists radical marxists, but despite that the taxation on dividends is zero %. USA, the all mighty capitalism in person, albeit with the socialist mullato in command, is about to have 40% taxes in dividends!! The world really changed up-side-down.

With 40% dividends taxation it makes absolutely no sense for companies to pay dividends. Yes, they can buy stocks, but I agree with you that this sucks terribly as an alternative.

I guess that as usual the rich will simply relocate their tax paying country elsewhere and the middle class which is not rich enough to do this will foot the bill.