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US Tax Cuts - A Practical Application

2canplay

TRIBE Member
Here a portion of a press release from yesterday from Rennaisance Learning, a company I follow:
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The company also announced that its Board of Directors declared a special cash dividend of $2.15 per share and its first quarterly cash dividend of $.04 per share, both payable March 1, 2004 to shareholders of record as of Feb. 13, 2004. "Today's Board action is a reflection of our confidence in the company's long term growth prospects and overall financial strength," stated Mr. Hickey. "Cash dividends are now a tax efficient option to return a portion of our strong cash flow and profits to shareholders without limiting the company's other opportunities for using cash to drive growth and shareholder value." It is the intention of the Board to continue to pay quarterly cash dividends, subject to capital availability and a determination that cash dividends continue to be in the best interests of the company and its shareholders.

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Rennaissance is 75% owned by Terrence and Judith Paul, the founding partners. They have done a good job of founding and building a profitable software company.

BUT, here's my issue.

They own 75%, worth about $600 million. Previously, Rennaissance had not paid any dividends whatsoever, because of the double taxation problem (taxed once in the corporation's hands and again at the personal level), so the only way for the Pauls to take money out of the company was to either sell their shares, triggering a capital gains tax OR live off their income as Chairman and Co-Chairman, which is also taxable.

Now, with the recent Bush Tax Cuts, they have another option - tax free dividends. With this press release, Rennaissance has announced that they intend to distribute $65 million of cash (out of $75 million on the books) on hand to shareholders, meaning about $45-50 million goes to the Paul's tax free. This implies a windfall to the Pauls of some $15 million, tax money saved by the Bush Tax Cuts.

I don't mean to pick on the Pauls, because many super-rich American's are doing the same thing (as I would if I were in their shoes) - but is this tax policy fair to the remaining 295 million Americans that are facing continued government cut backs?

I'd say no. For anyone who's read Al Franken's latest book, where he discusses the now-repealled Estate Tax, this will give further evidence to the unfairly skewed tax system in the US that systematicaly widens the gap between the have's and the have nots. Richest country in the world, with the widest gap of the industrialized nations.

Dave.
 

AdRiaN

TRIBE Member
Prior to this change, the United States, Ireland, and Switzerland were the only industrialized countries (out of 30 OECD nations) to offer no relief from double taxation of dividends. It's nothing ground-breaking.

Also, dividends in the United States are not "tax free" at the personal level. They are simply taxed a lower rate than employment income.
 
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