And it looks to me like a pretty straightforward wealth transfer. That coincidentally sets up another wealth grab later.

First it is important to understand what the issue is with how things work now.

Shareholders own the company. The usual assumption is that the company will make money, and grow, and eventually transfer money to the owners to recoup the owners their initial investment and work. Stock makes it easy for new would-be owners to get involved, and old ones to leave whenever they want. But when you buy and sell stock you are buying and selling part-ownership.

Of interest here is the question of how companies transfer money back to owners. There are two main choices. The traditional answer is dividends. The company gives each owner an amount of money proportional to how much they own. Since this is a straight transfer of wealth from one place to the other, you would expect that the value of the company falls by the same amount that is paid out. And this is exactly what happens. The second common answer is stock buybacks. Here the company buys out any owners who don't want to own the stock any more. Again this is a straight wealth transfer, the only difference is the mechanism and how the money is divided among owners. Oh, and taxes. But barring taxes and transaction costs, your result should be the same with reinvesting dividends and holding still in a stock buyback. Or accepting dividends and selling the right fraction of your stock in a stock buyback.

Now what is the deal with taxes? Quite simple. Every time a financial transaction happens, the government likes to be involved. If you get a dividend, that represents income from your investment, therefore it is your income, therefore they want in your income tax. If you sell something for a profit, they call that capital gains but are nice to you, they give you a slight break in the capital gains tax. (We are capitalists, we like encouraging capitalism.) Therefore there is a tax advantage to taking profit as capital gains and not income. So more and more companies have stopped handing out dividends. Of course lots of people like getting dividends, they understand dividends, gives them warm fuzzies. Hence it is manifestly "unfair" to discourage dividends.

This leads to Bush's proposal to eliminate the tax on dividends. Besides which, the money has theoretically already been taxed in corporate taxes. (But show me the corporation which in practice doesn't manage to convince the IRS that it shouldn't pay taxes. Even Microsoft [link|http://www.ecommercetimes.com/perl/story/4526.html|manages to lose money]!) This makes it cheaper to transfer wealth back in the form of dividends than stock buybacks. Furthermore if you own stock it manages to increase the real value of the future returns on that stock by the amount of tax you won't pay. With typical rates you would have paid 1/5 in taxes, so it is now worth 5/4 of what it was. And if it is worth 25% more to you, then you should be willing to pay more as well, so the stock price goes up. Given a current market cap of about $10 trillion or so for equities, that is a huge amount of money that gets produced. Wonderful!

Or is it?

As many have noticed, if your stock ownership is through things like IRAs, then you don't care. Modulo minor tranaction costs, it doesn't matter whether you get value back in dividends or buybacks. You pay no tax until you take it out, and then you pay income tax on what you made, no matter how it was made. So some people directly realize value, some do not. Of course if you don't directly realize value, you get some value from people who now want your stock more than you do. Of course that leaves the price somewhere between where it is worthwhile for you, and where it is good for them. Which means that you are less well off investing in stock, and they are better.

So who wins? Well it is people who are in a position to make a large fraction of their income in stocks. Of course you always see examples given with people whose total income is, say, $30K or so. However we all know that is not representative of this class of people, don't we?

And who doesn't win? People who don't own stocks, and to a lesser extent people whose main stock ownership is in retirement accounts. Most of us in other words.

So the tax burden shifts from wealthy to poor. Again. Further.

Oh, and this one gets even more abusible. After all all that someone gains is the ability to not pay taxes on dividends, they still pay capital gains of all kinds? Well unless their accountants are worse at accounting than I am, that isn't so. They won't have to pay either dividends or capital gains taxes!

How does this trick work? Quite easily. Remember what I said about companies that pay dividends? When the company pays dividends you get dividends and a corresponding loss of stock value? So what happens if you buy a stock just before it pays dividends, then sell it right after? Right! You get money tax free. And you also get a corresponding capital gains loss. The loss can now be used to offset some other capital gain. Wash, rinse, and repeat as needed to offset any inconvenient capital gain that you might have taken...

Nice trick. If you have enough money to make proper use of it. Which Bush does of course. As do many of his best friends. And armies of wannabes who have swallowed "trickle-down economics" hook line and stinker.

Cheers,
Ben

But I think that this brain-dump would need more thought and editing before publication makes sense.

Ben

As long as you buy before the ex-dividend, and sell afterwards, you get the dividend and take the corresponding loss. Even if you held the stock only for an afternoon and morning.

Because of bookkeeping getting confused, the dividend might get sent to someone else who then sends it to you, but you are the one who gets the dividend and takes the capital loss.

Cheers,
Ben