Corporate response to tax implications of the “Fiscal Cliff”
Dec 17, 2012
Each passing day brings the market closer to the reality of the “fiscal cliff”, and with that, relative increases in tax rates for dividend distributions. Compounding fears is general uncertainty—both about the ultimate adjustment to dividend and capital gains tax rates and about how investors and corporations will respond to the changes. Unfortunately, it can be a challenge to forecast the implications without having a perfect comparison period. But in looking at how companies have modified their dividend activity leading up to the new year, one can start to explore the question: will shareholder pressure force firms to shift their mix of capital distributions towards stock buybacks?
In September’s “Dividend Quarterly” brief, these questions were initially explored by looking at the effects of the reverse scenario in 2003. At that time, dividend and capital gains tax rates were cut with the dividend rate was more dramatically adjusted for investors at the highest marginal tax brackets (similar to projections for 2013). While establishing a causal relationship was difficult due to extraordinary factors—memories of the dot-com bubble, a number of high-profile corporate scandals, and a sluggish economy—the tax cuts were followed by a period of resurgence in the number of dividend payers and the total amount being paid out in the S&P 500.
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