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Companies release dividends ahead of fiscal cliff

Mark Garrison Dec 3, 2012
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Companies release dividends ahead of fiscal cliff

Mark Garrison Dec 3, 2012
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The Obama administration and Congressional Republicans continue to challenge each other as the deadline for the so-called fiscal cliff nears. Treasury Secretary Timothy Geithner and House Speaker John Boehner both spoke about the issue on Fox News Sunday this past weekend.

Geithner said it was time for Republicans to make a serious counter offer to existing proposals.

“They have to tell us what they’re willing to do on rates and revenues. That’s going to be very hard for Republicans. We understand that, but there’s no way through this without that,” he said.

House Speaker John Boehner said that the White House proposal of tax hikes and spending cuts is a non-starter. He also described how he reacted when he heard Geithner’s proposal: “I was just flabbergasted. I looked at him and said, ‘You can’t be serious.'”

But as the bickering in Washington continues, worries of the fiscal cliff are spreading to businesses and individuals alike. The uncertainty has prompted some companies to pay out special dividends to shareholders.

Bulk retailer Costco is one of them. It decided to dole out $7 per share — adding up to about $3 billion. So why are these companies shelling out that kind of money?

“The shareholders would rather pay 50 percent tax on their dividends to Uncle Sam,” says Allan Sloan, editor-at-large with Fortune Magazine, “than whatever the rate will be next year — which nobody knows, but is likely to be substantially higher.”

But while the fiscal cliff looms, the uncertainty surrounding it shouldn’t last forever. A few things could happen once a bit more stability returns, says Sloan.

“It’s going to depend on whether the tax on dividends is the same, or almost the same, as the tax on capital gains,” he predicts. “If dividend taxes are considerably higher going forward, what’s going to happen is: Companies will pay out less in dividends than they otherwise would, and will spend more money buying back stock.”

 

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