Back in May of this year, I wrote about Taxageddon or what is now in the headlines every day: the financial cliff. With the suggestions of the Democratic Party and President Obama, its more a tax cliff by now, as the left wing has almost no spending cuts in its program, but a lot of higher taxes. But I want to focus on just two side effects of the ongoing discussion about reversing tax cuts: Why it might come to a year-end sell-off and what currently happens to dividend policies of US companies.
Without an agreement in the next weeks - I would say latest by 24th of December - capital gains tax will raise. At the moment you pay 0 to 15 % capital gains tax. This will go up to a minimum rate of 10 % and as high as 20 %. While this is still comfortably low compared to most European countries, it will certainly make a lot of folks think about their year-end-action. Imagine you bought your stocks back in 2009, after the financial crises and they are up now by 100 %. It will certainly make a difference for you whether you have to give away 15 or 20 % of those gains. Just by selling now, and buying back later next week, you can cut the tax burden on this sale by 25 %. And if you worry about the market conditions at them moment, you should for sure sell now and not on January the 3rd.
To me, it remains unclear whether or not we already see some of those sales. You could interpret the sell-off after the announcement of Obama's victory as induced just by this fact. But it is mere speculation. You could also argue, that the outperformance of the European, especially the German market has something to do with this taxation issue.
Second tax cliff issue, that already led to tax evasive measurements announced publicly is the dividends tax. Taxation on dividends will move from 15 % to personal income tax rate - so to a maximum just short of 40 % federal tax (+ state tax). Companies noticed, that they and especially their large share holders will be worse of receiving dividends next year. Some of them took evasive action - and this is especially if you have huge shareholders (like a family, or part of the management. (Also do not forget, the dividends paid out are from the profits of the companies - they have already been taxed by roughly 30 % before they get paid to their owners!)
COSTCO will pay a special dividend of 7 USD/share while the normal payment rate is 0.275 USD per share per quarter. To do so, COSTCO raise 3.5 USD bn of additional debt. Share price did rise over 100 USD after the announcement.
And COSTCO is not alone. On 27th of November,
Financial Times counted 37 companies that had announced special dividends from October to early November and 66 that did so since the US election. The whole dividend issue might have pushed the indices up, as such announcements would put upward pressure on stock prices immediately (see the price hike in COSTCO).
Adding up the capital gains issue and dividend issue, the 'tax optimized investor' would have:
- sold all his non-dividend paying stocks with gains since he bought them by now
- bought shares of stocks who would announce a special dividend prior to such announcement (the hardest part - without insider knowledge you could have speculated during the last weeks who would do so, though)
- and will again sell all his dividend paying shares once he qualified for the dividend by mid December
- and then he will buy them back later in December or early next year for a discount.
Taking the discussion a step further, the ones expecting such behaviour would be short by now ... which leads us to the interesting question: is short interest in general higher at them moment than normally? A field for your input and my research ....
