Dividend Tax Cut



The president is proposing, and close to getting as part of his "Economic Stimulus Package" that all Dividends given to stock holders be tax free. While there can be an argument made that this is a fairness issue (I don't agree on the double taxation explanation.) it is being presented as part of the Economic Stimulus plan. It goes as follows:

If Joe doesn't have to pay taxes on his dividends he will use that money in our economy. Even better, he will invest that money back into the stock market where it will help create new jobs, new purchases from those companies selling the stock, etc.

I have a different fear.

If I have 100,000 shares of stock and am getting a dividend of $1 per share (outrageously high, but easier on the math.) That means every year I'd get $100,000 tax free. If I am in the 30% tax bracket thats $30,000 I would not be paying to Uncle Sam.

When it comes time to vote my shares I will have two choices. I could vote for directors who are for replanting profits back into the company, upgrading equipment, hiring more people, planning for the long haul or I could vote directors who promise to turn all profits into dividends.

If a company does not reinvest in itself the company eventually whithers and weakens. As a stock holder, I wouldn't care. I can sell my stock and invest in another company that is offering dividends. It will get me more money to jump from dividend paying company to dividend paying company than it will to do any long term planning. The shells of ruined companies left behind are the worries of their employees and their communities, not of mine.

My costs will only be the minor brokerage fees, and any losses in stock value from the time I bought the stock to the time I sell it. So I buy into a company, elect a board that turns over all its profits into dividends. The high dividends, now a tax shetler, will drive up the price of the stock. I then sell my stock in that company before the damage being done to it becomes apparent and while the stock price is greater than before. If I miss my timing on the sale and actually lose money on the stock price, I can write my losses off--more tax savings.

Basically I fear that companies will be made less efficient, new equipment will not be bought and new people will not be hired because dividends will be made the PRIME goal, not a long term successful company. This can only damage the economy, not be its aid and rescue as many are claiming.


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