> I also don't agree with Nomi that this measure is going to create bubbles.
> Scrapping double dividend taxation does encourage companies to pay their
> officers with stock, but siple ownership of stock does not create anything
> like the sort of incentives that ownership of stock options does. I'd also
> point out that ending double taxation removes a key advantage of debt
> finance over equity, and encourages a lower overall level of gearing.
>
fair. perhaps the word 'bubble' was strong, I could also call it a large pocket of non-taxed profit that would be retained by individuals directly connected to the company that issues the stock and pays the dividend.
I'm not sure that overall gearing will be lowered. Interest payments on debt are tax deductible to the corporation, part of the reason all the debt-bloated bankrupt companies paid little to no tax over the past 5 years (Enron paid none), but dividend payments won't be, they are afterall, part of a company's profit. There will be more stock issuance near term, precisely because of this net tax gain for corporations (which is so convenient for Wall Street, because debt's gotten harder to distribute with all the rating downgrades - about 40% of investment grade companies now trade just one-two notches over junk according to Moody's), but, debt always catches up.
The fact is, anytime there is a significant change in the tax status of a balance sheet item, there is an invitation to take advantage of it. It only has a minor effect if one company does it, but that's never the case. The way I described earlier was to lower senior cash compensation in favor of stock compensation. Another way is to increase the use of stock to back loans to executives. (The Corporate Library did an excellent study on corporate loans to executives called My Big Fat Corporate Loan - they found over a third of the largest US companies (by market cap) have loaned cash, the average loan size was $10.7 mln and the outstanding current loan balance is $4.5bln.) Though, the Sarbanes-Oxley Act addresses direct loans to execs, there remain ways to structure loans backed by stock off balance sheet. In WorldCom's case, Ebbers owes $408mln, but that loan, which was paid off by WorldCom mostly to the Bank of America is still collateralized partially by stock. And the S-O Act didn't address using stock to back corporate loans to the company as a whole, i.e. not going directly to executives. I could think of more ways to shift the balance sheet around, if you're interested.
With respect to how this is being spun by the Bush administration, Bush said in a press conference yesterday that this is a way to give 'Americans' more money in their pockets. Implicit in that statement, is that anyone who wasn't screwed enough during the past two years, should go buy some stock, because - it's tax efficient to do so. Aside, from the fact that stock ownership is skewed to the wealthy as the NY Times article and others on this list have pointed out, Bush & Co. are using this dividend tax change to prop the stock market and that's dangerous. It's only a step or two away from - say, let's address that social security system issue again, now that we've made stock ownership more attractive.
As far as stock options are concerned, you can still use stock to back more complex derivatives - say a derivative that is 'linked' to the appreciation of a stock as opposed to directly being a call on that stock.
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