Subject: RE: a stocks and dividends question
From: "Jerry Dwyer" <>
Date: Fri, 10 Jan 2003 11:10:00 -0500

---------- Original Message ---------------------------------- 
From: "Larry M. Augustin" <> 
Reply-To: <> 
Date: Fri, 10 Jan 2003 06:39:23 -0800 
>The key point in this thread (and I would agree) is that taxing dividends 
>differently distorts corporate behavior by discouraging dividends. 

Another way of saying it is that, given the progressive structure of the personal income
tax, the best solution ignoring tax-enforcement problems would be to impute all corporate
net income to the stockholders and let stockholders pay personal income tax on that
imputed net income. Costs of collecting the tax can make it cheaper for the IRS to collect
the tax from the corporation instead of individuals, which creates the present proposal.

The current situation involves relatively high tax rates on corporate income distributed
as dividends. The corporate income tax rate is not all that different than the higher
rates for individuals. The corporate tax rate plus the federal personal tax rate is
very high indeed -- on the order of 70 percent. Some of this can be avoided by not paying
dividends and buying back stock. Investors then can sell some of their stock to collect
cash and pay a 20 percent tax rate. It's even better than that to use a buyback because
the stockhoder gets to decide when to "realize" the income and pay the tax. The capital-gains
tax need not be paid until the stockholder wants the funds. Personal income tax is paid
when a dividend is received (even if it is reinvested in the company by buying more

Dividends appear almost dollar for dollar in stock prices. When a dividend "occurs",
i.e. the stockholder as of that minute will receive a check and later holders will not,
the price falls by about the amount of the dividend. Sometimes prices rise or fall later,
which does not affect the argument. The stockholder can sell right before the dividend
and get a higher price or the stockholder can sell right after the dividend and get
the dividend and a price lower by the amount of the dividend.

Jerry Dwyer