Dividend Tax Uncertainty Prompts Microsoft’s Record Pay Out

by Leroy Baker, Tax-News.com, New York

27 July 2004

Uncertainty over the future of dividend tax rates is seen as the likely motivation behind Microsoft’s decision to pay out a $32 billion special dividend – the largest in US corporate history.

By paying out the three dollars per share dividend this year, major shareholders in the Seattle-based software giant, including chairman Bill Gates, would insure themselves against a potential hike in dividend tax for top rate-payers next year if the Democratic presidential nominee John Kerry defeats George W. Bush in November’s elections.

Kerry has pledged to roll back a number of tax cuts passed in Bush’s 2003 fiscal stimulus package, including the cut in dividend tax from 35% to 15% for qualifying dividends. Under Kerry’s proposals, those with incomes of more than $200,000 per year would see an increase in dividend tax.

"The prospect of Senator Kerry becoming president could be viewed by some companies as an incentive to pay out dividends this year," noted Mark Garay, director of tax policy services at Deloitte & Touche in Washington, according to the New York Times.

"It would be even more of an incentive for closely held companies whose owners will be directly affected," he added.

An academic study conducted by the National Bureau of Economic Research released last month found that the 2003 dividend tax cut has contributed to an overall increase in dividend payments made by US corporations in the last year.

According to this research, after more than two decades of decline in the number of firms paying dividends, 2003 saw a dramatic and almost instant turnaround, with nearly 150 firms initiating payouts, adding more than $1.5 billion to aggregate quarterly dividends.

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