Good call on the dividend tax break

Matthew Hoy
By Matthew Hoy on January 9, 2003

It turns out that the Bush administration has preempted one of the Democrats methods of attack for the tax cut package. According to a New York Times News Service report, if a company pays no federal taxes, then it cannot pass on tax-free dividends to its shareholders.

Companies with losses or those that use various techniques that eliminate taxable income will find they have no tax-free dividends to hand out.

For the first time, in other words, companies that pay federal income taxes will seem more attractive to investors than those that find ways to avoid paying the taxes.

"There is less pressure on the company to shelter its income, because it will inhibit its ability to pay out dividends without tax," said Pam Olson, the assistant Treasury secretary for tax policy.

The president's plan also came up with a way for shareholders of profitable, tax-paying companies to get a break even if the companies decide to distribute little or no cash in dividend payments.

Companies that choose to reinvest in their businesses rather than pay dividends will pass on to their shareholders a tax break that will reduce the capital gain they report when they sell their stock.

That twist, not widely understood when the plan's details were first disclosed, means that the tax bill may benefit holders of new-economy companies such as Microsoft that pay no dividends, as well as owners of old-economy companies such as General Motors that do pay them.

This is an excellent help to the struggling stock market! Hopefully this aspect will get some good play in the national media and the news networks. Though, I'm not going to hold my breath.

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