Companies anticipated dividend tax hikes in 2010- lessons for 2012?

May 29, 2012

Dividend tax rates, currently 15 percent, are due to expire at the end of this year, one of a host of tax breaks going away unless Congress takes action.

If Congress fails to act, the rate will snap to about 40 percent.

A nearly identical scenario played out in 2010, and there may be some lessons to learn from the way businesses behaved the last time around.

An academic paper released this week dug into the events of 2010 and found that dividend-paying companies – especially those owned by insiders – took anticipatory steps to boost regular and special dividends when the fate of U.S. dividend taxes was uncertain in 2010.

The authors, a professor at the Massachusetts Institute of Technology and a Ph.D. student at the University of Michigan, said they believed it was the first empirical study of company behavior in the run-up to expiration of all individual tax rates and those for investments in 2010.

There had been anecdotal evidence that companies were making payouts anticipating tax policy. For example, Sara Lee Corp  issued a release on Oct. 28, 2010, that stated: given the “uncertainty surrounding the renewal of the current dividend tax rates,” its board had “decided to accelerate the payment of the dividend by one week so that stockholders can benefit from the lower dividend tax rate that is currently set to expire at calendar year end.”

The study drilled down to which companies were most likely to pay dividends early and found those with greater insider ownership – defined as a percentage of ownership by the top five positions – were most likely to take action.

“This suggests that policy makers should not only consider payout responses when considering changes to the dividend tax rate, but also recognize that merely considering policy changes is likely to elicit a behavioral response from some very tax-sensitive firms,” the paper said.

Put in place under Republican President George W. Bush and extended for two years by Democratic President Barack Obama, the fate of most individual income and investment tax rates will play a central role in a partisan fight likely to amp up after the Nov. 6 elections.

President Barack Obama and some other Democrats back hiking dividend taxes – though for the wealthiest Americans only.

Co-author Jeffrey Hoopes, Ph.D. candidate at the University of Michigan, said he didn’t want to comment on the merits of extending the low 15 percent dividend tax rate.

Hoopes said the paper found that statistically, compared to company actions in prior years,  the number of special dividends issued was likely due to the pending tax hikes at the end of 2010, rather than by chance.

“The number of dividends is enough using a statistical test you can be confident” taxes had an impact on company decision making, Hoopes said in an interview.

The “working paper” has been submitted for peer review.

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Here’s to hoping Congress decides to set the rate for next year before mid-December. We really don’t need any more of this last-minute legislation mess. If anyone else is interested, I found the paper mentioned in the article here:

Posted by poetandquant | Report as abusive