In Defense of the Dividend Tax

14 Mar

A few weeks late to this conversation, I admit, but I finally had a chance to catch up with my long overdue writing “assignments” and have had a burning desire to write this piece.

“Seldom has there been a clearer example of a policy that is supposed to soak the rich but will drench almost all American families.”

Recently, the Wall Street Journal published an article railing against Obama’s 2013 budget, which included a proposal to triple the tax rate on corporate dividends. Not surprisingly, the author’s position was that this was an atrocity, an attack on the middle class and further “proof” that the Obama administration’s economic policy is stifling growth. The author essentially argues that the double taxation of corporate profits are an unnecessary burden on flag-waving Americans, the tax increase disproportionately affects older Americans reliant upon steady income streams produced by dividend-paying stocks, stocks are less valuable because they are now discounted, and that the correlation between dividend tax rates and corporate dividend payments implies that companies won’t pay out dividends now because of the change in tax policy.

I find this argument to be flawed on many accounts, mainly on the grounds that it assumes that dividends are essentially an unalienable right of investors that their payment is an assumed “business-as-usual” responsibility of corporations. Additionally, the argument completely ignores the bigger picture of the tax hike’s intended affect on the economy as a tool to indirectly encourage corporations to direct their funds towards investments other than to their shareholders’ bank accounts.

First of all, corporations have no obligation to pay dividends, and they will not be adversely affected by this tax hike. Dividend-paying organizations have been able to grow their revenues, go public, and pay dividends in the first place because they introduced products and services that met a market need; their success is due to the customer, not to the shareholder. Take Apple for example – the tech giant is sitting on  nearly $100 BILLION in cash and only now are analysts so sure of the fact that it “is likely to declare…a dividend before the year is out.” Apple didn’t become a $500B company by placating investor demands – and really it, or any other company with  any significant value proposition – so investors should be lucky to have dividends at all in the first place!

Additionally, the author tries to paint a picture of a sad, old wrinkly fart that is more or less going to be financially ruined because of this tax hike: “IRS data show that retirees and near-retirees who depend on dividend income would be hit especially hard. Almost three of four dividend payments go to those over the age of 55, and more than half go to those older than 65, according to IRS data.” This is partly true. The 55+ demographic obviously comprises a disproportionate amount of the stockholders in the U.S. because these are consumers at the acme of their income-earning years, but let’s be real: anyone who “depends” on dividend income doesn’t really depend on dividend income. If you are in a place financially to where 25% or less of your investment portfolio (surely you’re diversified to the extent that dividend-paying stocks account for  less than a quarter of your investments, right?!) is your main source of income, then I have to imagine that you’re not going to be that adversely affected by this tax increase; particularly if the companies in which you’re invested stop paying dividends and instead use that excess cash to buy back stock, or invest in their operations – which could in turn further increase the value of your portfolio!

The author completely misses the point – tax policy can drive economic growth. Regardless of the tax rate, the significant majority of shareholders of dividend-paying stocks are not going to take that windfall and immediately recirculate those funds back into the economy; however, if companies are de-incentivized to pay dividends, they have a stronger impetus to invest in initiatives that create value for their customers, themselves, their shareholders…in essence, the economy as a whole.

Increasing the dividend tax might force a niche demographic to rethink the allocation of its investment portfolio, but more importantly, this proposed change in tax policy has the potential to directly impact the economy. That’s a good thing, right?



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