Editor’s note: Marc Leavy is a regular financial columnist for Business Reform Magazine, the leading Christian business magazine with over 100,000 readers. Each issue features practical advice on operating successfully in business while glorifying God.
The Senate destroyed a good tax package last week. Even if you do not own one stock, tax-free dividends will help you. If all your money is in non-dividend producing stocks in a retirement account, tax-free dividends is beneficial. Eliminating the double taxation will help you because it would have been a great boon to investors, driving up the market, a benefit to companies in reducing their cost of capital, and another benefit to you by prodding companies to pay shareholders a real benefit – money, instead of the intangible benefit of a higher stock price. The hope of tax-free dividends is not dead but it is in peril, thanks to those revolting Daschle Republicans.
Claiming to be a deficit hawk, Senator G. Voinovich has revealed himself as a man without conviction. A few weeks ago, on NBC’s Meet the Press, Voinovich made a confusing and inconsistent defense of his capitulation to liberal democrats regarding our tax cut. He repeatedly invoked the number of three hundred and fifty million dollars for a tax cut. Yet, he gave no rationale.
One of the best ideas in the President’s tax plan was the elimination of taxes on dividends. When asked regarding this aspect of the President’s proposal, Voinovich responded that he was all for simplifying the tax code but this was not the time. (Personally, I think elimination is the ultimate simplification.)
The elimination of shareholders paying taxes on dividends has little to do with simplifying the tax code. It is a benefit to the largest group of shareholders in the country, senior citizens. It also benefits everyone who owns a 401k, or an IRA, that has recently seen their principal cut in half. Tax-free dividends would bring back bondholders, those nice little old ladies who used to buy stocks for their dividends.
It would also have made a fundamental change in the stock market by giving shareholders a tangible benefit for stock ownership – a cash dividend. Now the only benefit of owning a stock is a rising share price, which is fantastic. Nearly all of last year’s scandals, however, were centered on artificially raising stock prices. I wonder if WorldCom would be bankrupt if they had to pay a dividend.
It is the Congress who is responsible for the incomprehensibility of the tax code. A self-proclaimed advocate of simplicity, Voinovich signaled endorsement for a plan that would exempt the first $500 of dividend income from taxes, an additional 10 percent of dividend income above $500 also would be excluded from taxes, with that rising to 20 percent in 2008 through 2012, and then it would disappear, leaving the decision to renew, or not renew, the provision with whomever is in the Congress at that time. God help us if George Voinovich is still there.
Some Daschle Republicans feel you should not get a tax cut, yet government spending will continue to grow at two to three times the rate of inflation. Our government spends TWO TRILLION DOLLARS a year. Why couldn’t the soon-to-replaced Senator find five hundred million dollars in that piece of the pie? Instead, the Daschle Republicans will lower taxes with their right hand and raise them somewhere else with their left hand.
Voinovich and other detractors state the tax cut has to be “paid for”. This abuse of the English language is unconscionable. You do not receive payment for something that you do not own. The government does not own our tax dollars. The Senator did not want to cut spending because then he would have to confront his fellow politicians. That would probably make him uncomfortable in the Senate sauna.
Over the last few decades, the dividend yield on the S&P 500 has dropped to around 1.6%, largely because those who received dividends were punished by taxes. The yield used to be around 6%. In 1972, the Dow Jones Industrial Average broke 1000 and fell back. It took ten years for that average to break 1000 again. However, if you were receiving dividends, you still achieved a double-digit return for that decade. But that won’t happen again. Because you cannot afford a tax cut.
Marc Leavy, CFP?,is a Certified Financial Planner who offers fee-for-service financial planning advice. Principled Investing teaches Solomon’s principles of investing and offers wisdom regarding comprehensive financial planning without conflicts of interest from commissions. He may be reached at [email protected].
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