It is time to make dividends, rather than capital gains, tax advantaged. They should be deductible against the companies income (akin to LLCs) and shouldn't incur payroll taxes but otherwise should be taxed as income. This would make them more valuable for lower income citizens who suffer under the payroll tax setup, and less valuable for the wealthy since they would be paying a high marginal tax rate on them. It would distribute capital ownership more widely and make planning a retirement income stream much easier to accomplish.
Capital gains should be taxed at windfall rates, say income + 10%.
Prioritize repeatable, stable profits over swing-for-the-fences highly-leveraged moonshots, and watch how many of these problems disappear.
> It is time to make dividends, rather than capital gains, tax advantaged.
So this is another example of the US being unable to find solutions to problems only it has.
This came up with the whole passthrough preferential treatment. The argument for it was that dividends were essentially double-taxed. So you end up creating a whole new set of complexity (eg what qualifies for it) when the solution is remarkable simple.
In Australia, dividends issued by companies come with franking credits. That means you get credit for any taxes already paid. The vast majority of dividends are fully-franked, meaning all funds have paid the 30% tax rate. Much less common are unfranked (no taxes paid) or partially-franked.
To give you an example. Say a company makes a profit of $10,000 and wants to pay it as a dividend. It pays 30% tax on it ($3000) and disburses $7000. Alice owns 10% of the company so she receives $700 (10% of $7000, being $10000 - the $3000 tax) and $300 in franking credits. If Alice's marginal tax rate is 30% she has paid all her taxes. If it's 40% then she owes 40% x $1000 = $400 - $300 in franking credits = $100 in extra taxes. If her marginal tax rate is 15% she gets a refund ($1000 x 15% = $150 is her liability so her refund is $300 - $150 = $150).
So no double taxation and all the recipients pay their marginal rates of tax on the income. Easy.
This is also a far cleaner way to deal with foreign withholding taxes. Let's say the dividend recipient is a foreign corporation, should they pay taxes on the income? Well, they already have. it's a policy decision as to whether they should get the taxes back or not. But again, it's handled by that system without having to create a foreign withholding taxes regime.
> Capital gains should be taxed at windfall rates, say income + 10%.
Yeah so you lose me here. I don't see the justification for this. Investment is typically in already-taxed dollars.
The reason that stock repurchases are better than dividends for most tax purposes is that the owner can elect to sell or not sell their stock rather than rely on the forced timing of a dividend.
So I don't get why stock repurchases are being singled out here. The original model for corporations was that companies make a profit, pay taxes on that and then either retain those profits, return them to the shareholders in the form of dividends or both.
This model has disadvantages. Not every shareholder wants to receive a dividend they then have to pay taxes on. The company also drops in value by the amount of money disbursed, which has its own issues (eg triggering wash sale rules).
Share buybacks are an alternative to returning money to investors. You use that same pool of money to buy shares on the open market. The company has lost that same asset (the disbursed cash) to those investors who want to receive that money (ie by choosing to sell) and the stock price remains unchanged.
So this is (IMHO) concentrating on the wrong problem. The real problem is that companies can borrow money to return to shareholders through dividends or buybacks rather than repatriating foreign profits, which would otherwise make those profits subject to US taxes. So this is a near-indefinite deferral of US taxes.
In my opinion, we need to treat any form of borrowing as effective repatriation of retained foreign profits that then get taxed accordingly.
As for bailout funds, I'm totally fine with all of these restrictions until the loan has been repaid:
1. Any borrowed funds are treated as repatriation of foreign profits as per above. Why bailout companies who are choosing not to pay US taxes?
2. A freeze on executive compensation, including no extraordinary bonuses, additional stock grants and so forth. Additionally, all such compensation from the previous 12 months needs to be clawed back.
3. No disbursement of any kind to investors while the bailout loan remains unpaid. This includes dividends and buybacks.
Why should there be a blanket ban on stock repurchases? If a company has excess cash, you're advocating they can't put that cash to work "betting" on their future performance?
I however do agree if a company takes a recent government "bailout" they should be restricted from buybacks until they payback the loan/bailout.
I'd could argue that the "excess" cash might be better used to raise employee wages, reduce work hours, etc. etc. All those things that make human workers a bit happier but c'est la vie
One option could be to restrict repurchases (and dividends) that would take the company below some threshold of savings, based on expenses. For example: any company worth over $X needs to hold a years worth of expenses in hand at all times - if they go below, they cannot issue a dividend or buy back any stock.
Of course, the details matter enormously here, including how things like debt factor into the equation.
vearwhershuh|6 years ago
Capital gains should be taxed at windfall rates, say income + 10%.
Prioritize repeatable, stable profits over swing-for-the-fences highly-leveraged moonshots, and watch how many of these problems disappear.
cletus|6 years ago
So this is another example of the US being unable to find solutions to problems only it has.
This came up with the whole passthrough preferential treatment. The argument for it was that dividends were essentially double-taxed. So you end up creating a whole new set of complexity (eg what qualifies for it) when the solution is remarkable simple.
In Australia, dividends issued by companies come with franking credits. That means you get credit for any taxes already paid. The vast majority of dividends are fully-franked, meaning all funds have paid the 30% tax rate. Much less common are unfranked (no taxes paid) or partially-franked.
To give you an example. Say a company makes a profit of $10,000 and wants to pay it as a dividend. It pays 30% tax on it ($3000) and disburses $7000. Alice owns 10% of the company so she receives $700 (10% of $7000, being $10000 - the $3000 tax) and $300 in franking credits. If Alice's marginal tax rate is 30% she has paid all her taxes. If it's 40% then she owes 40% x $1000 = $400 - $300 in franking credits = $100 in extra taxes. If her marginal tax rate is 15% she gets a refund ($1000 x 15% = $150 is her liability so her refund is $300 - $150 = $150).
So no double taxation and all the recipients pay their marginal rates of tax on the income. Easy.
This is also a far cleaner way to deal with foreign withholding taxes. Let's say the dividend recipient is a foreign corporation, should they pay taxes on the income? Well, they already have. it's a policy decision as to whether they should get the taxes back or not. But again, it's handled by that system without having to create a foreign withholding taxes regime.
> Capital gains should be taxed at windfall rates, say income + 10%.
Yeah so you lose me here. I don't see the justification for this. Investment is typically in already-taxed dollars.
alasdair_|6 years ago
The reason that stock repurchases are better than dividends for most tax purposes is that the owner can elect to sell or not sell their stock rather than rely on the forced timing of a dividend.
unknown|6 years ago
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unknown|6 years ago
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cletus|6 years ago
This model has disadvantages. Not every shareholder wants to receive a dividend they then have to pay taxes on. The company also drops in value by the amount of money disbursed, which has its own issues (eg triggering wash sale rules).
Share buybacks are an alternative to returning money to investors. You use that same pool of money to buy shares on the open market. The company has lost that same asset (the disbursed cash) to those investors who want to receive that money (ie by choosing to sell) and the stock price remains unchanged.
So this is (IMHO) concentrating on the wrong problem. The real problem is that companies can borrow money to return to shareholders through dividends or buybacks rather than repatriating foreign profits, which would otherwise make those profits subject to US taxes. So this is a near-indefinite deferral of US taxes.
In my opinion, we need to treat any form of borrowing as effective repatriation of retained foreign profits that then get taxed accordingly.
As for bailout funds, I'm totally fine with all of these restrictions until the loan has been repaid:
1. Any borrowed funds are treated as repatriation of foreign profits as per above. Why bailout companies who are choosing not to pay US taxes?
2. A freeze on executive compensation, including no extraordinary bonuses, additional stock grants and so forth. Additionally, all such compensation from the previous 12 months needs to be clawed back.
3. No disbursement of any kind to investors while the bailout loan remains unpaid. This includes dividends and buybacks.
Focusing solely on stock buybacks is misguided.
nodesocket|6 years ago
I however do agree if a company takes a recent government "bailout" they should be restricted from buybacks until they payback the loan/bailout.
Infinitesimus|6 years ago
alasdair_|6 years ago
Of course, the details matter enormously here, including how things like debt factor into the equation.
unknown|6 years ago
[deleted]
unknown|6 years ago
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