Where Has All The Money Gone, Pt IV – Dividends
We’ve already seen in previous installments of this series that since about 1980, I: corporate profits have soared, II: the slice of profits going to finance has soared even more, and III: wages have stagnated. Here we see what corporations have done with all that money. There is a limited selection set: pay taxes, distribute as dividends, pay down debt, invest, make acquisitions, speculate, and hold as cash.
Here is a look at taxes through 2008 and dividends through 2010, as percentages of profits; data from BEA table 7.16, lines 19, 20 and 38. For my purposes, profits are divided among taxes, dividends, and all the other things mentioned above, which I’ll call the Residual.
Dividends/ Profits are in green; Taxes/Profits in red. I’ve added 13 year moving averages to clarify the trends over time. The Dividend percentage bottomed in 1978 at 20.6%. I’ve marked that year on both curves with a yellow dot. After that, dividend payments took off sharply and have been mostly in the 40 to 50 % range since 1989. The tax rate on dividends was reduced to 15% in 2003, also marked with a yellow dot, but I don’t think that change has had much effect on dividend payout. The gyrations in the payout percentage since 2003 are largely due to the denominator affect, as profitability increased after the 2001-2 recession, and plummeted during the recent Great Recession. Notably, 2010 profits are the highest ever.
The tax payout drop lagged the dividend increase by several years, and didn’t start dropping until 1987. In 1986, the tax payout rate was 45.2%. After a sharp drop to 27.7% in 1992, the payout rate increased throughout the Clinton administration, topping at 34.5% in 2000. Then, there was another sharp drop. It has since leveled off, averaging 25% since 2004.
In 1978, the 13 year averages were 24.2% for dividends and 42.4% for taxes. Those averages are now 28.3, and dropping; and 45.7 and rising, respectively 45.7 and rising for dividends; and 28.3% and dropping for taxes – essentially a reversal of positions. The net result is a massive funneling of money from government to dividend recipients who now are paying only 15% tax on their dividend income.
This is not only “Starve the Beast” in action, it is a massive redistribution of wealth into the hands of those who already have the most. Say what you will about the relative efficiencies of the private and public sectors in using resources, the public sector places money into the hands of people who will spend it and keep the economy moving. The private sector largely funnels it into rent seeking.
For the sake of completeness, here is a look at the Residual – as defined above – with a 13 year moving average and a best fit straight trend line.
This provides a partial explanation for Jon Hammond’s observation that net corporate investment has been down over the duration. There is less residual to invest.
Bottom line: Corporate profits have been skewed to dividend payments, to the detriment of worker salaries, government tax revenues, and corporate investment.
Cross posted at Retirement Blues.
Since dividends are not deductible at the corporate level, dividends are actually taxed twice, at the corporate level and at the individual level. If you factor this into your chart, the total taxes paid as a percentage of corporate profits is probably much flatter than indicated. I’m not sure there is really the “massive redistribution of wealth” you claim.
I would be curious to see how much stock and stock options have been given to management over this time period. How much of this increase in dividends is delayed/disguised compensation to managers. Becuase even if it’s taxed twice, at the individual level it is taxed at a much lower rate. I think dividends are a good thing. I’d like to see sock prices down where they are reasonable multiples of dividends insteat of being speculative bets of future appreciation. That just leads to asset price bubbles, and the average investor will always be the last in and the first out in an asset bubble.
I would be curious to see how much stock and stock options have been given to management over this time period. How much of this increase in dividends is delayed/disguised compensation to managers. Becuase even if it’s taxed twice, at the individual level it is taxed at a much lower rate. I think dividends are a good thing. I’d like to see sock prices down where they are reasonable multiples of dividends insteat of being speculative bets of future appreciation. That just leads to asset price bubbles, and the average investor will always be the last in and the first out in an asset bubble.
I would be curious to see how much stock and stock options have been given to management over this time period. How much of this increase in dividends is delayed/disguised compensation to managers. Becuase even if it’s taxed twice, at the individual level it is taxed at a much lower rate. I think dividends are a good thing. I’d like to see sock prices down where they are reasonable multiples of dividends insteat of being speculative bets of future appreciation. That just leads to asset price bubbles, and the average investor will always be the last in and the first out in an asset bubble.
This tired argument of double taxation for stockholders is wearing thin. So if we are going to use this argument then we should be in favor of eliminating the “limited liability” of stockholders. Pass through the income without “double taxing” and pass through responsibility without limit.
It’s not double taxation. It’s two transactions. The corporation pays tax, (if it owes any), and the individual that receives the dividend pays tax at the capital gains rate. (Much lower than most average taxpayer ordinary income tax rates.
It’s worth noting, I think, that every dollar going into the coffers of the “job creators” is a dollar that comes out of general circulation. In other words, there’s that much less for Americans to borrow to start a business or get training, for corporations to spend on research, for government to invest in human capital. The economy won’t get much better until this trend reverses.
Brian –
Actually, it woud be steeper, not flatter. Back in the 50’s, the top marginal personal tax rate was 91%.
Dividend tax rates have bounced around a lot over time, including being tax free.
But none of that is really relevant to the discussion, which is how the portion of corporate profits going to taxes and dividends has reversed since the 70’s.
Cheers!
JzB
You think the money gets hidden in a coffee can in the back yard?
Rusty –
No. It goes to Lichstenstein, the Cayman Islands, or into the securities market which contributes nothing to real investment. It’s an oddly-shaped coffee can, and the yard is the shape of the derivatives market, at about 20X aggregate global GDP.
Cheers!
JzB
You need to get to part V – stock buybacks. While dividends are up a bit, corporations have been really shoveling their profits out the door to shareholders through stock buy-backs. In 2007, companies paid out more in stock buy-backs then they made in earnings. JW Mason covers it well here – http://slackwire.blogspot.com/2011/10/disgorge-cash.html
Jazz,
Your chart shows dividens up, taxes down, so I’m having a problem getting this:
“In 1978, the 13 year averages were 24.2% for dividends and 42.4% for taxes. Those averages are now 28.3, and dropping; and 45.7 and rising, respectively – essentially a reversal of positions.”
into the securities market which contributes nothing to real investment
And which securities market is that?
Since pension funds hold roughly 50% of all equity, perhaps you want to rethnk that idea.
It may be “two transactions” but that is irrelevant. It is two taxing incidents on the same income. The number of transactions may vary as a matter of form but the economic substance is the same income gets hit with a higher tax rate. If you want to focus on form over substance, go ahead, but the history of progressive thought for the past 125 years is to do the opposite, to focus on economic substance.
No, it may be spent on a second home in Tuscany or a pied-a-terre in Manhattan. More likely the “job creator” has already acquired those goodies, and lord only knows what else, and the next years tax reduced income gets put into equities returning 3%-5%.
That would be any securities market wherein I can purchase someone else’s equity position in an established business. Hardly a job creating investment. If I invest in corporate bonds the money might be used for growth and/or expansion, but it has to be newly issued debt and not for the purpose of retiring old debt. Then again I might take a piece of an IPO. Some of that money may be used for expansion, but much may only go to cash out in part the earliest investors at as high a multiple as the suckers can be coaxed to pay. Nothing like an IPO to get the bubbles expanding.
Dan –
I stated it backwards in the now case. Should be –
Taxes from 42.4 then to 28.3 now (25, if you look at the avg only since 2004);
Divs from 24.2 then to 45.7 now.
Thanks for the catch.
JzB
mark t: “It is two taxing incidents on the same income.”
But you gotta remember, corporations are people. 🙂
Well maybe the next post can be about how much money the Federal Government wastes and has wasted on the military.
Jack, many companies do equity offerings all the time (not just IPOs) to raise additional capital for plants equipment continuing ops etc. – and a strong stock price allows that to happen. Debt requires a company to pay interest, equity does not, and many companies pay zero dividends especially in their growth phase.
For example:
ARIAD Pharmaceuticals, Inc. (NASDAQ: ARIA) is raising cash to help support the commercialization of ponatinib in patients with resistant or intolerant CML and additional clinical development of its investigational targeted cancer medicines. All of the shares are being sold by the company rather than by holders. The pricing went off at $10.42 for some 21.5 million shares. The total gross proceeds before the effect of any overallotment shares is about $224 million.
For all practical purposes, ARIAD is in the pre-revenue stage of operations. As far as the full details of the funding, the capital raise will allow ARIAD to “continue treatment and follow-up of patients in the pivotal PACE trial of its investigational pan BCR-ABL inhibitor.
Dan –
I fixed it. Thnx.
JzB
mcwop –
A worth-while topic, but I don’t think it’s mine.
JzB
Mark –
If we’re going to to rethink, lets get the facts right. Pension funds hold about 18% of the equiities. You can find the breakdown here.
http://www.ritholtz.com/blog/2011/06/who-owns-the-u-s-equity-market/
JzB
The substance is that no matter if the taxation is single, double, or some other multiple, there is still an enormous accretion of wealth at the top of the pyramid, and more so the higher one gets.
By bringing up the pseudo-issue of double taxation, you are the one introducing form.
Cheers!
JzB
Jack –
Exactly so.
JzB
Ragweed
I did intend to end the series here. No promises, but I’ll see what I can do. Don’t hold your breath though.
Cheers!
JzB
mcwop
Debt vs equity is a busines decision best made on a case by case basis. Having too much equity relative to debt is not the best use of capital, since there is no opportunity for leverage.
As to “many companies do equity offerings all the time.” Really? Can ARIAD issue new shares today, then go back to the equity market next year and the year after? I seriously doubt that there are many companies who can fly that high that fast.
Cheers!
JzB
Aren’t these things two sides of the same coin?
If marginal tax rates on dividends are high, shareholders would prefer to delay taxation on their share of corporate income, thereby advocating for companies to hoarde excess income rather than disgorge in the form of dividends or sharerepurchase. Contra, if marginal tax rates are low, investor prefer to have their income sooner rather than later. Further, if marginal tax rates are low, the hurdle for reinvesting in the business increases. To the extent that tax policy is less distorting in its impact on companies (mis)allocating capital to marginal investments because of tax avoidance, in theory, I think this should improve overall economic efficiency.
Similarly at the corporate tax level, as marginal taxes decrease the opportunity cost of making bad, i.e., potential loss-producing, investments increases, thereby fewer marginal ventures are funded. One could argue that as a result we’re missing out on breakthroughs that are fantastic for aggregate welfare, but that likely fails to take into account all the other projects that fail after years of malinvestment.
Jazz you conviently ignore the 20% mutual funds slice of the pie and the household slice. How much of that is represented by IRA’s and 401k’s? The number owned by retirment plans of all stripes, pensions, IRA and DC plans is higher than 18%.
mcwop –
Note that the houshold slice also includes non-profits and hedge funds. Note further that the top 1% owns half of the household equities. IRA and 401K holding might not be so skewed to the top, but they certainly are not going to be skewed to the bottom. We’re still going to see the vast majority of holdings in the top 50%, and very likely above the 70% mark.
But that is not the main point. Corporatoins are paying less in taxes, and the mony, almost dollar for dollar, has gone into dividend payments. This has an upward slant, any way you slice it.
JzB