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FYI: In the middle of the 20th century, it was possible to see a respectable nominal return from equity dividends, as measured by the aggregate market total return from dividends. In the chart below, Bespoke shows us the annual dividend-only return for the S&P 500 by decade. Regards, Ted https://www.bespokepremium.com/think-big-blog/dividend-investing-going-the-way-of-the-dodo/
Much of this trend is by design. That sharp drop in the 90s came when tax laws were changed so that corporations could no longer deduct executive compensation above $1M, except if it was in the form of pay for performance such as stock options. That was to "align" execs' interests with that of shareholders.
So stock grants to execs soared. A natural consequence appears to have been a shift to distributing earnings as buybacks (boosting share prices) rather than as dividends. The latest tax cut built on this by giving corporations piles of cash that they have been using for buybacks rather than as special dividends.
Buried in that statute is an undoing of the 1990s rule allowing companies to deduct pay-for-performance payments to execs. But that comes with some qualifications:
- contracts in place as of Nov 2, 2017 are grandfathered (so these buybacks help all the current execs)
- corporate tax rates were cut from 35% to 21%. Previously, the value of this pay-for-performance deduction to corporations was 35¢ on every dollar of compensation. Now it's only 21¢. That reduced the impact of removing the deduction.
I couldn't do the research to prove it myself, but I do wonder if the share buy-backs haven't been yet another factor in shifting wealth away from wage earners in favor of high salaried and wealthy people. The latter are more likely to see their net worth increase with capital appreciation (due in part to the buy-backs), even if they are paper gains. As fewer and fewer workers are covered by pensions, and as existing pensions are threatened by under-funding, people at the lower end suffer more. Low interest rates have been sighted as a cause of pension stress, but workers currently contributing to pensions or those already retired suffer disproportionately to those whose wealth obviates the need for them to depend on a pension. Some stock-market wealth trickles down to pensioners, but these days these people are more likely to see benefit and pension cuts when great wealth is being created for the top of the heap.
This one looks even more lopsided than buybacks, because the only ones who benefit are those with securities in taxable accounts. The exposure to the stock market for middle class workers is primarily through retirement plans which get no benefit.
(In IRAs and employer-sponsored plans, there's usually no cost basis to adjust for inflation, so retirement plan investments get nothing out of this proposal.)
Comments
So stock grants to execs soared. A natural consequence appears to have been a shift to distributing earnings as buybacks (boosting share prices) rather than as dividends. The latest tax cut built on this by giving corporations piles of cash that they have been using for buybacks rather than as special dividends.
Buried in that statute is an undoing of the 1990s rule allowing companies to deduct pay-for-performance payments to execs. But that comes with some qualifications:
- contracts in place as of Nov 2, 2017 are grandfathered (so these buybacks help all the current execs)
- corporate tax rates were cut from 35% to 21%. Previously, the value of this pay-for-performance deduction to corporations was 35¢ on every dollar of compensation. Now it's only 21¢. That reduced the impact of removing the deduction.
As it turns out, companies have gotten so used to paying out these huge grants that getting rid of their tax break doesn't bring about any change in policy. That's the conclusion of this Economic Policy Institute study. The ACA had already cut back the deduction for CEOs of health insurers as of 2013. Didn't change anything.
https://www.epi.org/publication/does-tax-deductibility-affect-ceo-pay-the-case-of-the-health-insurance-industry/
https://www.businessinsider.com/trump-capital-gains-inflation-index-tax-cut-is-it-legal-2018-7
This one looks even more lopsided than buybacks, because the only ones who benefit are those with securities in taxable accounts. The exposure to the stock market for middle class workers is primarily through retirement plans which get no benefit.
(In IRAs and employer-sponsored plans, there's usually no cost basis to adjust for inflation, so retirement plan investments get nothing out of this proposal.)