Why Corporate America Fears Taxes More Than Recession

Agenda-Setting Financial Insight.
Nov. 29 2012 1:26 PM

Why Corporate America Fears Taxes More Than Recession

93036956
Warehouse retailer Costco announced a special $3 billion dividend on Wednesday.

Photo by Spencer Platt/Getty Images

President Barack Obama is seeking input from Corporate America on the so-called fiscal cliff. But whatever company honchos may be saying about the risk of recession in 2013 if tax hikes and spending cuts kick in on Jan. 1, it looks as if they actually fear higher taxes more than a downturn.

Exhibit A is the recent flurry of special dividends, including a $3 billion whopper announced on Wednesday by warehouse retailer Costco. Data group Markit says 112 firms so far this quarter have already pulled the trigger on special dividends. They include casino operator Las Vegas Sands, which will send more than $1 billion to Mitt Romney’s pal Sheldon Adelson, his wife and the trusts the billionaire controls. Markit expects 20 more firms to do something similar before the year is through.

It’s notable that many of the companies announcing special payments have big family-owned stakes. These early distributions will save shareholders money if tax rates on dividend income do go up next year, from the current 15 percent.

But paying out cash isn’t a rational response if the fiscal cliff is a recipe for a downturn. In that case, companies ought to be hoarding it. The nonpartisan Congressional Budget Office has long said U.S. output would fall. That has given corporate chiefs like Mark Bertolini of Aetna and Dave Cote of Honeywell a bandwagon from which to implore Washington to do something to avert a metaphorical plunge into the abyss. If the real fear is not so much the health of their companies as that of any dividend recipients’ pocketbooks, it’s a less compelling line.

In the aggregate, U.S. companies have plenty of cash to play with. But some are giving away their buffer against future trouble. Costco’s cash balance, for example, barely covers the special dividend - even if it could all be spared. That explains why the company is borrowing billions to give shareholders their potential tax break. Other companies like Dillard’s and Brown-Forman announced payouts that were bigger than their cash balances, at least as reported in their most recent earnings releases.

If Obama and Congress manage to hammer out a deal, there’s no harm done. And if it includes a dividend tax increase, these companies will be heroes to their shareholders. But some of them are making a risky wager given that the stakes for the economy are supposed to be so high.

Read more at Reuters Breakingviews.

Agnes T. Crane is a Reuters Breakingviews columnist, based in New York, where she covers capital markets and Latin America. She joined from Dow Jones Newswires, where she was an award-winning journalist who led a team of reporters covering the credit crisis.

TODAY IN SLATE

Politics

Smash and Grab

Will competitive Senate contests in Kansas and South Dakota lead to more late-breaking races in future elections?

Stop Panicking. America Is Now in Very Good Shape to Respond to the Ebola Crisis.

The 2014 Kansas City Royals Show the Value of Building a Mediocre Baseball Team

The GOP Won’t Win Any Black Votes With Its New “Willie Horton” Ad

Sleater-Kinney Was Once America’s Best Rock Band

Can it be again?

Technocracy

Forget Oculus Rift

This $25 cardboard box turns your phone into an incredibly fun virtual reality experience.

One of Putin’s Favorite Oligarchs Wants to Start an Orthodox Christian Fox News

These Companies in Japan Are More Than 1,000 Years Old

Trending News Channel
Oct. 20 2014 6:17 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Politics
Oct. 20 2014 8:14 PM You Should Be Optimistic About Ebola Don’t panic. Here are all the signs that the U.S. is containing the disease.
  Business
Moneybox
Oct. 20 2014 7:23 PM Chipotle’s Magical Burrito Empire Keeps Growing, Might Be Slowing
  Life
Outward
Oct. 20 2014 3:16 PM The Catholic Church Is Changing, and Celibate Gays Are Leading the Way
  Double X
The XX Factor
Oct. 20 2014 6:17 PM I Am 25. I Don't Work at Facebook. My Doctors Want Me to Freeze My Eggs.
  Slate Plus
Tv Club
Oct. 20 2014 7:15 AM The Slate Doctor Who Podcast: Episode 9 A spoiler-filled discussion of "Flatline."
  Arts
Brow Beat
Oct. 20 2014 9:13 PM The Smart, Talented, and Utterly Hilarious Leslie Jones Is SNL’s Newest Cast Member
  Technology
Technocracy
Oct. 20 2014 11:36 PM Forget Oculus Rift This $25 cardboard box turns your phone into an incredibly fun virtual-reality experience.
  Health & Science
Medical Examiner
Oct. 20 2014 11:46 AM Is Anybody Watching My Do-Gooding? The difference between being a hero and being an altruist.
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.