The wealthy look set to enjoy a windfall in the closing weeks of the year as companies push money out the door to beat the higher tax rates advocated by President Barack Obama.
More than 150 companies, from Costco Wholesale Corp. (Nasdaq: COST) to Las Vegas Sands Corp. (NYSE: LVS), have declared special dividends totaling about $20 billion this quarter to avoid anticipated tax increases in 2013, according to data compiled by Bloomberg. Others, including law and private-equity firms, probably will pay bonuses, partnership distributions and commissions early for tax reasons, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, N.J.
“We’re going to have a big jump in household income in the fourth quarter” said Crandall, whose company is a subsidiary of ICAP Plc, the world’s largest broker of transactions between banks. “It’s going to be in excess of $50 billion.”
Much of that will go to upper-income Americans, the very people Obama has targeted to pay higher taxes, including Las Vegas Sands controlling shareholder and Chief Executive Officer Sheldon Adelson.
Of the $123.6 billion in qualified dividends reported to the government for 2009, about 52 percent was received by those making more than $250,000 for the year, according to the latest data available from the Internal Revenue Service.
Americans working on the production line are not seeing the kinds of gains the rich are enjoying. Average hourly earnings for production workers rose 1.3 percent in the 12 months to November after a 1.2 percent increase the prior month, the weakest since Labor Department records began in 1965.
“This is just another indication of how incredibly unequal the income distribution has become over the past 28 years,” said Josh Bivens, research and policy director at the Economic Policy Institute, a Washington group that says it focuses on the economic condition of low- and middle-class Americans. “Wages are less equal than they used to be and capital income is less equal than it used to be, and there’s been a shift from labor income to capital income.”
The money won’t have much impact on consumer spending or economic growth because the wealthy are more likely to save rather than spend it, said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. (NYSE: JPM) in New York.
“If they really wanted to spend, they would have spent by now,” the former Federal Reserve economist said.
Costco’s dividend of about $3 billion was the largest announced in the fourth quarter as of Nov. 28, exceeding a $2.3 billion payment from Las Vegas Sands, according to a report by Citigroup Inc. (NYSE: C) strategist Erin Lyons. The payment from Las Vegas Sands would give Adelson $1.2 billion, according to Bloomberg calculations.
Adelson and his wife, Miriam, contributed $33 million to two super-political action committees in the last three weeks of the presidential election campaign in an unsuccessful effort to defeat Obama, Federal Election Commission filings show.
Stocks rose today, after the longest weekly rally in the Standard & Poor’s 500 Index since August, as economic data in China beat estimates and investors watched the latest developments in American budget talks. The S&P 500 gained 0.03 percent to close at 1,418.55.
China’s industrial output climbed 10.1 percent in November from a year earlier and retail sales growth accelerated to 14.9 percent, while inflation was 2 percent, the statistics bureau said yesterday.
Reports in Europe Monday showed French business confidence and industrial production unexpectedly declined as President Francois Hollande grapples with a budget deficit and an economy that is on the verge of recession.
U.S. households probably will have their incomes squeezed next quarter as a temporary payroll-tax cut expires and emergency unemployment benefits are scaled back, Feroli said.
And unlike the year-end boost to incomes, the hit to paychecks in 2013 will affect spending and the economy — for the worse — because cash-strapped Americans will feel the pinch, he added. He reckons that budget belt-tightening on the federal, state and local levels will shave two percentage points off growth next year. The economy will expend 1.7 percent in 2013, after climbing 2.2 percent this year, according to Feroli.
Obama has said an increase in tax rates on income above $200,000 for individuals and $250,000 for married couples must be part of a deal to prevent the rest of the more than $600 billion in automatic spending cuts and tax increases from taking effect in 2013.
Under the president’s proposal, the top statutory tax rate on ordinary income would reach 39.6 percent, up from 35 percent, and the top rate on capital gains would be 23.8 percent, up from 15 percent. The maximum rate on dividends would go to 43.4 percent from 15 percent.
The government stands to benefit from higher revenue in the short run as companies and investors position themselves ahead of the end of the year. In the long run, the government might suffer, said Eric Toder, co-director of the Tax Policy Center in Washington.
The IRS will collect taxes on dividends that might not have otherwise been paid out when 2012 tax returns are filed. The Treasury Department also will enjoy higher revenue from capital gains taxes as investors unload shares to lock in profits before a possible rate rise in 2013.
More than two out of five U.S. investors surveyed last month said they are selling securities that have appreciated in price ahead of the end of the year, according to the latest Bloomberg Global Poll.
What may be lost is the ability of the government to tax that income at a higher rate in the future, Toder said.
“You could see a tax windfall in year one,” said Chris Philips, a senior analyst at Vanguard Group Inc.’s Investment Strategy Group in Valley Forge, Pa. “But the knock-on effects in years two through whatever are questionable.”
Wal-Mart Stores Inc. (NYSE: WMT), the world’s largest retailer announced on Nov. 19 that it was moving the payment of its fourth-quarter dividend to Dec. 27 instead of the previously scheduled Jan. 2.
“Wal-Mart’s board recognized that there are complex fiscal and federal tax-rate issues that may not be resolved in the next few weeks,” Randy Hargrove, a spokesman for the Bentonville, Ark.-based retailer, wrote in an emailed statement.
The impact on the economy of the fourth-quarter lift to income will be limited, if history is any guide.
In December, 2004, Microsoft Corp. (Nasdaq: MSFT) offered a $32 billion special dividend. The payout helped boost personal income by 3.3 percent from the prior month, the largest gain in the last 19 years, according to the Commerce Department in Washington.
Consumer-spending growth slowed in the first quarter of 2005 as Microsoft investors saved the money they received, Commerce statistics show.
A similar pattern was evident in the early 1990s as companies brought forward payments of bonuses and other compensation in anticipation of tax increases by incoming President Bill Clinton in 1993 and a payroll tax rise in 1994.
Personal income surged 3.4 percent in December of 1992 and of 1993, the largest jumps since 1950. Yet the growth of spending the following month slowed in both cases, according to Commerce Department data.
“If you’re a high-income person, whether you get cash in December or January isn’t going to make much difference,” Toder said. Except in this case, they’ll be paying lower taxes, he added.