Why MSFT hates dividends.

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Jan. 4 2003 2:39 AM

Double Secret Taxation

The Fray defends the tax code, more or less.

Double secret taxation: Re-reacting to the Daniel Gross's attack on the drive to reduce taxes on dividends, the Moneybox Fray moves in several directions. Apparent newcomer snsh takes Gross to task for minimizing the Microsoft example here:

Microsoft is the poster-child of the issue, due to their $40 billion savings account … [MSFT] is controlled by long-term investors (Bill Gates and senior Microsoft employees) who have been gradually selling off shares, paying the lowest tax rate (20%) on their stock. If instead Microsoft paid dividends, Bill Gates would pay the highest tax rate (40%) on the dividends … So, it is in the interest of the people who control Microsoft to not pay dividends.

Is this bad? I don't know.

That moment at the end, where snsh refuses to leap from the description of a system set up to benefit particular shareholders to a condemnation of it, is particularly salutary. snsh amplifies that unwillingness to give an easy answer in a later post, in defending the complex tax code:

To prevent loopholes, taxes should be spread out over everything -- income, sales, excise, gas, property, payroll, dividends, capital gains, etc. Yes, with multiple taxes there will sometimes be triple-taxation, but as long as the net tax is usually reasonable (i.e. 40% not 70%), then intelligent accountants will find ways around the worst cases and most everyone will be okay.

Why are these such attractive posts? Because they take on the issues that are near and dear to the whiny hearts of very different political persuasions (plutocratic conspiracy; the evils of the tax code) and make it clear that the whining is a reflex, not a measured response ...

Means-while … ChasHeath looks to score some non-whiny political points here "The biggest double-tax is the payroll tax. The payroll tax gets taken out, and then you're taxed again on the full income, unless you earn over $84,000 or get paid in incentive stock options" and does our homework for us here:

One of the assumed truths that we've been hearing about corporate dividends lately is that dividend payments have been out of favor lately, compared with historical norms.

And what does he find when he runs the data series?

[C]orporations have been paying out a higher fraction of cash flow through the 1990s (rising to around 40%) than through most of the post-war period, and the low point for payouts was during the 1970's and 1980's (around 25%) …

Material Boi: Sometime Microsoft adversary David Boies has declared the mistakes in Tyco's corporate earnings "not … material to the overall financial statements of the Company"; Daniel Gross asks "Since when is a $382 million earnings restatement 'not material'?" The Moneybox Fray, naturally has an answer. As mfbenson puts it here:

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