Tax Cut Effects on Corporate Dividend Policies Uncertain

As both houses of Congress and the White House begin work on finalizing a huge 10-year tax cut that includes changes to incomes taxes on dividends, companies are adopting a wait-and-see approach when it comes to changing their policies on issuing dividends.

"At this point we've had no specific directions as to what impact this will have," Chris Preuss, Washington spokesman for General Motors Corp., was quoted in the Washington Post (“Firms Cautious on Prospect of Dividend Tax Change,” May 16, 2003). A spokesperson for Intel echoed a similar sentiment, saying, “…I haven't heard that this would mean we'd do anything different."

At the heart of the matter is treatment of the taxes on dividends. The White House was hoping to eliminate the tax altogether, arguing against a “double taxation, which first taxes corporations and then investors. But it now seems likely that the White House will need to compromise on its plan, as AccountingWEB reported earlier this month.

Under the House version, the tax isn’t eliminated, but instead the maximum tax on dividends drops from 38 percent to 15 percent until 2012. And the version the Senate passed last week, halves the dividend in 2003, eliminates it in 2004 and 2005, and reinstates it in 2007. In addition, neither the House nor the Senate version requires corporations to pay taxes in order for the changes in taxation of dividends to take effect.

Some critics contend that the Senate version may cause corporations to delay paying dividends until investors would receive a more favorable tax treatment. But other experts say that companies most likely will not make changes to their dividend policies, regardless of the final bill. These experts say that companies like to keep their dividend payouts consistent, and besides, roughly 60 percent of common stock owners aren’t subject to tax anyway. Analysts also say that corporations will probably not pay attention to any sunset provisions set into the law.

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