Over the past few decades US companies have gone to great lengths to avoid paying any taxes. Corporate taxation as a percentage of the total amount received in the federal government coffers has plummeted from around 25% in the 1960s to half that figure by the end of 1990s.
Yet, if President Bush’s plan to end taxation on corporate dividends passes unamended, it will have the consequence of penalising shareholders in companies that already have successful tax avoidance plans in place.
And could in fact, spur companies into paying taxes.
The devil in the detail of Bush’s plan is that dividends would only be tax-free if companies can show they paid taxes on their original profits.
This is logical because the rationale behind the Bush plan is to end the double-taxation of dividends.
Take for example freight railway company CSX. A quick scan of the company’s annual reports reveals that since 1998 it has made more than $900m in profits but has not paid one cent in federal taxes.
However, the company has paid hundreds of millions of dollars to its shareholders in dividends. If this scenario were to be repeated in the three years after the implementation of Bush’s plan, CSX would still pay no taxes and its shareholders would still pay on their dividends. Not exactly a plan for economic stimulus.
But if those same shareholders held stock in companies that paid taxes on their profits they would be able to claim a deduction.
One question is, will executives take into account their own personal tax situations when deciding on which tax avoidance loopholes to charge through?
Will investors buy shares in companies that offer tax-free dividends and ignore the rest? How much extra work will be involved for business to calculate which profits they paid taxes on and which they didn’t? And how much more complicated will the tax forms be for individual investors?
Those questions are ones that could be asked as Bush’s plan faces a tough time becoming law. Although the Republicans control all branches of government, there are enough opponents – in both parties- to make the proposal’s passage through the Senate very difficult.
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