tax policy Archives -

This Should Convince You That The Fiscal Cliff Is Real

In what I consider a combination of gun and financial news, Sturm, Ruger & Company declared a special dividend of $4.50 per share. By contrast, their regular third quarter dividend was 38.2 cents. While CEO Michael Fifer says in the statement below that this special dividend will increase Ruger’s return on shareholder’s equity, I can’t help but wonder if tax considerations also played a role in this.

Come January 1, 2013, there will be a new 3.8% Medicare tax on investment income including dividends for individuals with adjusted gross incomes over $200,000 and couples with adjusted gross incomes over $250,000. In addition, dividends for those in the 25 % or above tax brackets are currently taxed at 15% and nothing if one is in the 10 or 15% bracket. If Congress and the President do not come to an agreement and the Bush-era tax reductions revert to their old levels, dividends will be taxed at 10% for those in the 15% tax bracket and 20% in any bracket above that. Thus, some taxpayers could be seeing their dividends taxed as high as 23.8% or an almost 59% increase over current levels.

The takeaway is that the fiscal cliff is real, taxes do matter when it comes to investments, and that companies are taking it seriously. Now if only those within the Beltway were equally as serious.

Sturm, Ruger & Company, Inc. (NYSE: RGR) announced today that its Board of Directors voted to declare a special dividend of $4.50 per share on the Company’s issued and outstanding shares of common stock. This cash dividend will be paid on December 21, 2012 to shareholders of record as of December 7, 2012.

Chief Executive Officer Michael O. Fifer commented on the special dividend, “The decision to return this cash to our shareholders was based on an analysis that indicates we can continue to fund our high rate of organic growth, including expected increases in both working capital and capital expenditures, and fund our quarterly dividend while still growing our cash reserves at a modest rate. In addition, the special dividend will substantially increase the Company’s return on our shareholders’ equity, as the equity will now more accurately reflect the net assets being used in the conduct of the business. Likewise, after the special dividend, our long-term investors will still own the same future stream of earnings, resulting in an increase to their return on investment.”

Mr. Fifer concluded, “This special dividend reflects our confidence in the future to be able to pursue good opportunities that come our way. We remain committed to our new product development strategy and will continue to seek accretive acquisition opportunities and prudently expand our manufacturing capacity.”

This Ad Irritates Me

The Obama campaign has been playing the ad below virtually non-stop in western North Carolina for the past couple of weeks.

CBS News Anchor and 60 Minutes Correspondent Scott Pelley’s question is ignorant and the Obama campaign just loves it.

Why do I find the question ignorant?

First, it ignores totally that any capital that Mitt Romney invested has already been taxed once. This is not pre-tax or tax-deferred monies upon which no tax was withheld. Romney has already paid tax on the capital invested and probably at a 35% rate or higher. I say higher because the original investment could very well be from 2002 or earlier. If so, Romney paid anywhere from 38.6% to 39.6% in taxes on this money.

Second, by focusing in on the relative amount of tax paid by Romney, Pelley ignores the absolute amount in dollar terms – $2.8 million. Thanks to the astute investment managers who run his blind trust who generated a $20 million long-term capital gain, Mitt Romney has just paid more in taxes than most people earn in a lifetime.

Third, Mr. Pelley should be asking why Obama supporter Warren Buffett’s Berkshire Hathaway (of which I am a shareholder) has never paid a dividend. One answer is that dividends are taxed at a higher rate than capital gains. If Buffett paid himself a dividend, he would have to pay more taxes.

Fourth, it is good public policy to tax long-term capital gains at a lower rate than ordinary income. It provides an incentive for investors to put up the money needed for business growth. If there is no business growth, there are fewer jobs. Fewer jobs also mean lower tax revenues. When capital gains rates have been lowered in the past there was a net increase in revenues even though the rates were lower.

Finally, I hate both the ad and the question for the divisive “us versus them” attitude it takes. This is America where we celebrate risk takers and not some Euro-socialist country that has driven out all the entrepreneurs.