Special Dividends and The Fiscal Cliff: Say One Thing, Do Something Else

I read an interesting story the other day over at The Wall Street Journal about Jim Sinegal, the CEO of Costco. It talks about how Mr. Sinegal made a prime-time speech at the Democratic National Convention in support of President Obama. He of course knows that the President wants to raise taxes on the wealthy and impose a 3.8% investment tax on the wealthy as well.

So it’s surprising that Costco has decided to make a special dividend of $7 per share payable to shareholders before the US hits The Fiscal Cliff. (This dividend was set to be paid on Friday.) This equates to $3 billion for shareholders, which will be conveniently taxed at the current rate of 15%.

Some reading this may think the special dividend isn’t a big deal because many corporations have paid special dividends in the past. While this is true, not many companies borrow the money to pay a dividend. The majority pay dividends from earnings. So it appears that Costco borrowed money to pay this special dividend before tax rates rise. Costco claims that they are doing this because interest rates are low due to the Federal Reserve keeping rate artificially low.

While this is true, let’s take a look at the big picture: Costco pays a special dividend in 2012 to avoid higher taxes in 2013. It borrows this money, and because it is a corporation, it gets to use the interest it is charged as a deduction on the corporation’s tax return. While interest rates are low, borrowing $3 billion will have a couple of dollars in interest charges.

The Fiscal Cliff

I don’t know why, but this makes me mad. I guess it’s because Mr. Sinegal, along with Mr. Buffett are billionaires all in favor of paying higher taxes. But when it comes time to pay the higher taxes, they are going to find ways to skirt it. Which means the tax burden is going to fall on the Average Joe. I still say that if you want to pay a more taxes, Mr. Billionaire, then put your wallet where your mouth is and make a “donation” to the IRS. Here is the link to do so. Surprisingly, no one has made a donation. Nope, they are just going to keep talking the talk. (And don’t even get me started on Hostess declaring bankruptcy but then paying corporate bonuses.)

Just for fun, Mr. Sinegal and his wife will make roughly $14 million from this special dividend. After taxes, that comes to about $12 million. Had Costco waited until next year to make this dividend, Mr. Sinegal and his wife would be taking home $8 million.

Final Thoughts

Hopefully this is a wake-up call to those only in favor of raising taxes on the rich. My guess is it won’t solve squat. It’s like trying to become a millionaire by cutting coupons alone. It’s not going to work. You need to increase your salary along with cutting expenses. We need real reform of both the tax code as well as spending cuts.

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  1. says

    The number of companies doing the whole ‘pay it earlier’ thing is pretty impressive, at this point. I’m surprised that the tax treatment of dividends isn’t getting more press. the last time they were treated differently than long term capital gains we had this little ‘tech bubble’ thing, where companies that paid no dividends seemed to do pretty well (ha).
    PK recently posted..Should We Cut Spending or Raise Taxes To Avoid Driving Off The Fiscal Cliff?My Profile

  2. says

    It is pretty absurd how the extremely do preach all the ‘tax the rich more’ bs and then just sit back and wait for it to happen. Nothing is stopping them from voluntarily paying extra tax now. They just want to make sure everyone outside of their little club follows suit too.

    As for the special dividend, it’s not too surprising that companies would do that. It’s a massive difference in the amount of tax they’d have to pay otherwise. That part doesn’t bother me much since it’s accepted practice to avoid taxes however you can.

    • moneysma says

      I don’t mind for the most part that companies are paying special dividends. After all, they are looking out for the shareholder and paying the dividend now benefits the shareholders. I have a problem when the company takes out debt to do so, which is unprecedented. Added to that, the CEO is all for higher taxes, but decides to get his money now.

  3. says

    Wow…I guess I shouldn’t be suprised by this. Like you said, the rich will always find ways around paying higher taxes, unfortunately. That is why we need comprehensive tax reform, in my opinion. I also think that raising taxes AND cutting spending is going to be necessary to pay down our national debt. You have to do a combination of both, and probably in a pretty substantial way.
    Greg@ClubThrifty recently posted..Club Thrifty: Turning Our Dreams into RealityMy Profile

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