1nv35t wrote:Dividends are a greater risk, you can't phone up the company and ask to not be paid a dividend this year because the state had opted to punitively tax them and you have enough in cash already anyway ...
Actually, you
can do exactly that! Whether the company grants your request is the thing that is in doubt, not your ability to make it... ;
-)
Which has a serious point to it, namely that the company probably will grant the request if enough shareholders make it, or can be forced not to pay dividends by shareholder resolution. And companies that can see a clearly-better tax situation for their shareholders as a whole are reasonably likely to come up with changes to how they pay their shareholders themselves. Minor examples include companies that normally pay their dividends not too long after the start of a new tax year bringing them forward to just before the end of the previous tax year if the new tax year's tax changes include ones to make dividends more heavily taxed.
A more major example is that I understand from others' posts (it's about a decade before I got any experience at all of dividends or any other significant investment income) that when investment income was punitively taxed in the 1970s, companies found methods to make capital payments to their shareholders in place of dividends. Plenty of such methods still exist - examples include issues of redeemable shares (as done by Rolls-Royce, though for company tax reasons rather than shareholder tax reasons), tender offers and share buybacks. They do all now have to have a single dividend-income-or-capital-payment decision made for all shareholders by the company (which it does by choosing to pay a dividend or use another method), not individually by shareholders, because tax law now says that if shareholders get such individual choices, the payment will be taxed as dividend income regardless of its actual nature. So there aren't as many as there were, and the ones that do exist aren't as flexible as some of the ones that have gone - but there are still quite a few of them. And they do generally have more flexibility than dividends, specifically with regard to receiving or not receiving the payment - one can choose not to redeem one's redeemable shares, whether to tender one's shares in a tender offer, whether to sell one's shares on the market or not when the company is buying shares back. (The advantages of dividends are the flip side of that flexibility: a streamlined payment process that involves fairly low costs and no difficult decisions for either company or shareholders once the amount to be distributed has been determined.)
The point of all that is that people often talk about the possibility of punitively taxing dividends as though it would be dead easy. But it isn't, not as anything more than a meaningless political gesture that quite quickly ends up raising very little tax, because companies can rapidly switch to other methods of distributing surplus cash. In particular, many companies already have all the mechanisms in place for both paying dividends and doing buybacks: for them, it would literally just involve a decision to put less cash into dividends and more into buybacks. And while buybacks are disliked by many individual shareholders, I suspect that dislike would pale in comparison with their dislike of punitive taxation!
Also, a lot of their dislike of buybacks is basically due to the practical difficulties an individual shareholder faces in participating in a buyback: they see cash going to big shareholders and not to themselves. And while in theory they can participate by selling into the market proportionately to and in sync with the buybacks, there are the practical difficulties of the selling costs (both monetary and the investor's own time) and of exposure to market price fluctuations between the time the company buys back and the time they sell, with a trade-off to be made between the two: the more closely you try to track the buybacks, the less the exposure to share price fluctuations but the greater the selling costs. The point of which is that I'm pretty certain that a "participate in buybacks" service for shareholders could be designed that would reduce those difficulties in the same way that DRiPs reduce the difficulties of reinvesting small dividends, and would be if there were sufficient demand for it. And companies increasing the use of buybacks at the expense of dividends because dividends were being punitively taxed might well set off that demand...
None of that's to say that punitive increases in the taxation dividends are subject to won't happen. They might, but to be reasonably effective at raising tax revenues, they would have to be accompanied by either blocking off other methods of returning cash to shareholders or corresponding punitive increases in the taxation those other methods are subject to.
As a result, I'm not very worried about the possibility of punitive taxation that applies
specifically to dividends, since I think it would be little more than an ineffective, easily-worked-around political gesture. Which doesn't mean that it won't happen - such gestures have been known (*) - but if it does, it's at most likely to require a bit of rearrangement of my investments.
I am more worried about the possibility of punitive taxation that applies more
generally to investment returns. But there's little or no reason for that to be relevant to a decision about whether to invest in dividend-paying or non-dividend-paying shares today, even if I'm intending to hold them long-term.
(*) CGT's 30-day rule is IMHO one of them - supposed to stop "bed-and-breakfasting", and technically did, but tax advisers were phoning their clients within 24 hours after it was announced to let them know of alternative ways of achieving the same effect...
Gengulphus
