Like a falling barometer indicates impending bad weather, the actions of businesses are an early warning sign when Congress is about to harm the economy. Congress and the President continue to drag their feet on extending the 2001 and 2003 tax relief. The common assumption is that some compromise will be reached where the tax cuts are extended for all taxpayers for at least a few years. Businesses are not so deceived. They are anticipating higher taxes and acting accordingly.
The latest sign came from Regal Cinemas, which decided this week to offer an extraordinary dividend payment to its shareholders before the end of 2010. The $1.40 per share dividend payment will reduce the Regal’s retained earnings by $210 million.
Regal offered the special dividend now because they believe the tax rate on dividends will rise from its current 15 percent rate to 40 percent in 2011. Regal thinks the dividends tax rate is going up because, despite all the back and forth in Congress this week, it expects Congress to allow the 2001 and 2003 tax relief to expire. Many other businesses will soon follow Regal’s example and return value to shareholders through one-time dividend payments before Uncle Sam takes a bigger chunk of those payments next year.
The retained earnings businesses will use to pay these special tax-driven dividends could otherwise be used to invest in new projects and add new workers. Instead, businesses are using the funds to compensate their shareholders before the jump in the dividends tax rate. This is one of the contributing factors to the slow economic recovery and anemic job growth.
Seniors also stand to be hurt by the higher tax dividend tax rate. Once businesses pay out special dividends this year, they will undoubtedly cut back on dividends payouts next year because of the higher tax rate and look to return value to their shareholders in other ways. Fewer dividend payouts will punish seniors that depend on the income from dividends to supplement their Social Security.
A higher dividends tax rate would also depress stock prices. This would be a double-whammy for seniors, because they would earn smaller gains when they sell their stock holdings to further supplement their income.
The troubling dividends tax hike is just a part of the massive tax hike that would occur if all the other 2001 and 2003 tax cuts expire on December 31. The economic damage from those tax hikes would further punish the already battered economy.
Hopefully Congress will prove the business community wrong and extend all the tax cuts for the sake of the ailing economy. But just like they take cover when the barometric pressure plunges, Americans should start preparing for the economic storm that would result from the tax hikes that businesses tell us are on the way.