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The Dividend Bust?

A close look at the effect of the dividend tax cut reveals a disappointing investor reaction.
Fortnightly Magazine - October 15 2003

has only been a few months since the passage of the act and investor evaluations and planning may not have yet fully settled down. However, given the factors discussed above, the dividend tax reduction is likely not going to be the slam dunk many thought it might be for utilities.

  1. "Review & Outlook: Ending Double Tax Trouble," , Dec. 26, 2002, p. A14.
  2. In legislative parlance, a "sunset provision" means that a law is automatically repealed (or expires) on a specific date unless specifically reauthorized.
  3. See Richard Stavros, "Double Taxation Repeal: Fire or Ice?," Public Utilities Fortnightly, Jan. 15, 2003, p. 15.
  4. See Richard Stavros, "The Dividend-Centric Universe," Public Utilities Fortnightly, June 15, 2003, p. 16.
  5. The Congressional Budget Office's August 2003 Budget and Economic Outlook estimates that the 2004-2008 budget deficit will be more than $1.4 trillion.
  6. While IRS regulations concerning the eligibility for the new lower tax rates for dividends have not been finalized as of this writing, it appears that dividends on trust preferred securities will not qualify for the lower tax rate. See Jeff D. Opdyke and Tom Herman, "Wall Street Pushes Preferred Stock," , Aug. 19, 2003, p. D1.
  7. Patrick McGeehan, "A Chance for Utilities to Clean Up Their Act," The New York Times, Aug. 24, 2003, p. 6.

Salient Changes

For investors, the salient changes in "The Jobs and Growth Tax Relief Reconciliation Act of 2003" are:

  • a reduction in income tax rate brackets (the top rate was reduced from 38.6 percent to 35 percent);
  • a reduction in the maximum tax rate on capital gains from 20 percent to 15 percent; and
  • common stock dividends formerly taxed at the personal income tax rate (which went as high as 38.6 percent) are now taxed at a maximum of 15 percent. 1
  1. Lower income taxpayers have to pay only a 5 percent tax on both capital gains and common stock dividends.

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