New tax proposal could boost dividend appeal

OOnce again, the tax discourse is at the forefront on Capitol Hill. The Biden administration wants to raise taxes on income and capital gains on people earning more than $ 400,000 a year and couples earning north of $ 450,000.

Many taxpayers are not in these brackets, and it remains to be seen whether there is enough congressional support to get these efforts across the finish line and into the president’s office. Perhaps more notable to all investors is a recent proposal by Sen. Ron Wyden (D-OR) and Sen. Sherrod Brown (D-OH) that seeks to levy a 2% excise tax on the buyout plans of d ‘actions.

“And so, if a company bought back shares, except as part of an employee pension plan or employee stock compensation, it would pay 2% excise tax. Thus, if a company bought back $ 1 billion of its shares, it would pay an excise tax of $ 20 million on this transaction, ”explains David Harrell, editorial director of Morningstar Investment Management.

Generally speaking, a 2% tax may not be enough to deter some large, cash-rich companies from buyout plans. However, there is a long-standing debate between buybacks and dividends, and when it comes to corporate taxes, companies generally like dividends because the shareholder pays the taxes. Buybacks are useful in reducing the number of shares outstanding, thereby increasing earnings per share.

“If you look at the press release that came out with a proposal last week, they were pretty self-explanatory in the sense that they were trying to affect the behavior of companies but not to increase dividends but to try to encourage companies to instead of using this money for buyouts to reinvest in themselves and their workers, ”adds Harrell.

Currently, the Wyden / Brown plan is sparsely detailed, and with the White House pushing for more tax hikes, the buyout proposal could be pushed back to another time. As 2022 is a midterm election year, politicians from either party might not be quick to push for tax increases on businesses, some of which are donors to their campaigns.

Conversely, if the buyout tax materializes, some companies might simply reduce or stop buyout plans and satisfy investors by increasing dividends, allowing shareholders to foot the tax bill.

A greater focus on dividends could be a plus for exchange-traded funds, such as the SmartETFs Dividend Generator ETFs (DIVS). As it stands, the DIVS is up 9% since April, proving to investors that the fund is benefiting from the resumption in global dividend growth and is approaching pre-pandemic levels.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.