Does tax policy change the way in which people behave economically? Could higher tax rates generate lower revenue to the government? This has been an age old tug of war amongst economists since the Kennedy administration proposed tax cuts in 1962, and the ushering in of the so called "Laffer Curve" by Professor Arthur Laffer when he argued against the 1974 tax increases. Today, with the U.S. mired in tax uncertainty, and with the general feeling that rates are on their way up, we have a couple of stories which are anecdotal in nature, which may suggest that there may indeed be a behavioral impact by rising tax rates.
First is a story reported by CNBC regarding companies that have announced billions of dollars in special dividends to be distributed before year end. Interestingly, some companies are making these distributions by taking on debt to do it. Dividend tax rates are in serious jeopardy of being raised and perhaps being raised significantly. Public companies are citing this uncertainty to distribute outsized dividends and have their shareholders lock-in existing low tax rates.
First to announce was Costco Inc., which announced a $7-a-share dividend and is taking on $3 billion of debt to do it. According to the CNBC story, Joel Levington who is a managing director of corporate credit at Brookfield Investment Management said “I think what you’re seeing is a reaction to the lack of clarity around the tax laws, and that’s what Treasurers and CFOs are doing”. Another company which has recently announced a debt financed dividend distribution is Murphy Oil which just recently announced that it would use the proceeds from its $600 million debt offering of to make a special dividend prior to year end. There a scores of other public companies that are using existing cash hordes to make distributions this year.
The second story is a recent UK Telegraph story which provides that approximately two-thirds of Britain's million-pound earners have disappeared since the 50% top marginal tax rate was introduced in the 2009-10 tax year. There were more than 16,000 million pound earners in the year prior to the tax rate hike. There were only 6,000 taxpayers declaring incomes of more than £1 million. The story mentions that "It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes."
Today, Washington is in the middle of an economic/political tornado referred to as the "fiscal cliff". At the heart of these deliberations is the rate at which the government taxes its citizens. It is useful to contextualize how actions (or lack of one) in Washington can have long lasting effect on people's behavior and the overall economy.