Posts Tagged ‘Taxes’

Tax goodies for investors

December 17, 2010

I’ve been holding my breath until Congress came to grips with not raising taxes – and I can exhale, now that “the Bush tax cuts” have been signed (once again) by a president. George W. Bush and Barack H. Obama – who’d have thought it?

Three cheers for compromise, bipartisanship and not shooting our economy in the foot as of Jan. 1. So here are the tax goodies that apply to investors:

  • The top tax rate on dividends remains at 15% through 2012, a boon to shareholders of companies with healthy yields. Investor relations people for utilities and other firms with attractive dividends should breathe a sigh of relief.
  • The top tax rate on long-term capital gains also remains at 15% for two years. So equity investors are encouraged to keep taking risks in pursuit of gains. And this helps public company shareholders and small business owners with gains in M&A transactions.
  • Some industries may profit from specific cuts – e.g., extensions of the R&D tax credits and incentives for businesses to buy capital goods.
  • Of course, the tax bill is also a stimulus bill. Retail spending and GDP should get a shot in the arm from keeping the Bush-era tax rates for all, AMT patch, extension of unemployment benefits and 2% cut in payroll taxes for 2011.

You can debate whether all this is good policy, either in the way it structures our income taxes or the way it affects near-term deficits. There is controversy. But I’m glad to see it resolved – in favor of keeping money in the hands of the people.

Of the tax-bill coverage I’ve seen, Forbes’ “Tax Dude” blogger Dean Zerbe has the best headline …

The Tax Bill: Santa Comes Early

… and by far the best illustration, showing “Obamaclaus.”

Merry Christmas to all, and to all a good night.

© 2010 Johnson Strategic Communications Inc.

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The American way

July 2, 2010

Going into Fourth of July weekend, a friend who has helped raise capital for privately owned businesses – and a couple of public companies – offered his theory about why capital isn’t flowing into enterprises that could reignite our economy.

There’s “plenty of money” sitting in private equity funds and other investors’ stashes, this serial CXO and strategic thinker suggests. But people with the wherewithal to fund growth companies, mostly, aren’t taking the plunge right now.

The reason is the way investors feel about Washington, he opines. Not the place, but the US government’s massive extension of its legislative and regulatory reach. Government is seeking to govern so much more: new rules to prevent the next bubble or flash crash or oil spill, new agencies, health care mandates, too-big-to-fail bailouts, tougher penalties, stronger stimulus … public-sector stimulus.

And higher taxes to pay for it all. Bush-era tax rates will yield to higher rates. Revenue enhancement is in vogue. We’re even looking at the value-added tax.

But the worst part? “It’s the uncertainty” – not knowing what the rules of the game will be in one, two or three years. Washington is pressing its ongoing expansion of control in all areas of business – at a time when the economy is fragile.

So investing in a long-term way today means taking on risks of yet-unwritten mandates and so-far-incalculable costs from tomorrow’s “hope and change.”

Before long, this discussion begins to sound uniquely American: complaints from independent-minded business people against an overly ambitious government.

Which brings me around to one of my annual rituals: re-reading the Declaration of Independence around the Fourth of July. The words soar to rhetorical heights:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed.

It’s a reminder of why we’re here – in America. And, apropos of my lunchtime conversation about the uncertainties of government on steroids, this time my eye catches on another line, one of the founders’ grievances against King George III:

He has erected a multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance.

No doubt some CEOs, CFOs and even investors feel a bit like that. We’re wondering how much this reform or that Act will eat out “our substance,” how ramped-up regulation will hinder access to credit and raise costs of capital, or what new taxes will come unbidden out of the Beltway.

Not suggesting a revolution – only that we need to give thought to capital formation, to investing and a climate that enhances confidence in the American system. We need investors to resume funding the small and mid-sized firms that, after all, must hire those unemployed workers and create real, sustainable growth.

The American way isn’t negotiated by politicians or codified in 2,000-page bills. It’s not put out for public comment in the Federal Register. Instead, it is thrashed out in the competitive, pressurized, sometimes Wild West openness of the market. The market-driven approach is what, once, put US business on top of the world.

Let’s keep in mind that the American way – still – is about freedom.

Have a great Fourth of July!

© 2010 Johnson Strategic Communications Inc.

While we’re thinking about taxes

April 16, 2010

“Today is the first day of the rest of your taxable year.”

– Jeffrey Yablon, a Washington tax lawyer
who has compiled an extensive and amusing
collection of quotations on taxes and life

I know, I know – we’d like to forget about taxes now that we’ve survived the annual runup to April 15. But this post-deadline breather actually may be a good time to think about taxes and how they relate to our mission in investor relations.

Taxes on corporations and various aspects of business are bound to change – OK, I really mean bound to increase – in the coming years. IR people need to be looking ahead to understand the impact on our companies’ P&Ls.

The first round of disclosures came three weeks ago after health reform became law. A few companies disclosed that one change in the health law will cost them billions in additional taxes (see post on Disclosing ObamaCare’s impact). This caused a brief outrage and flurry of saber-rattling in Congress, until lawmakers thought better and canceled a hearing that would have grilled executives on the GAAP-required charges. That would have given business leaders a forum to testify on the actual costs of what Congress passed.

What’s next? Hard to say, but various changes are in the works …

  • New taxes under the 2010 healthcare law will impose costs on pharmaceutical companies, medical device makers, and health insurance companies …
  • Not to mention the cost of healthcare coverage requirements, which everyone’s still sorting out, including a $2,000 a head penalty for employers who don’t cover workers and an excise tax down the road on “Cadillac” health plans …
  • President Obama has proposed taking away foreign tax credits and deferrals for US companies, a potential $200 billion of additional revenue …
  • The president has proposed taxing large banks and financial institutions to pay for the bailout …
  • Unless something changes, the “Bush tax cuts” will expire at the end of 2010 for individuals – including both the 15% maximum capital gains tax and 15% maximum tax on qualified dividends. Higher marginal rates on stock-related income will affect shareholders; it’s hard to say how this tax increase might affect dividend policy or other ways of returning cash to shareholders.
  • Other taxing ideas are floated almost daily. As a non-accountant and non-politician, I won’t attempt to lay odds on the various proposals. But Washington is on the hunt for revenue – that much we know.

Already, the US imposes the second-highest corporate tax rate among the world’s industrialized countries – 39.1% in combined federal and average state taxes – according to 2009 OECD data cited by the Tax Foundation. (This site also has a state-by-state comparison of combined corporate tax rates.)

The effective tax rate – what companies actually pay after working the system – is the operative issue for disclosure, along with potential balance-sheet impacts of deferred tax assets or liabilities. The conservative Cato Foundation estimates the US effective tax rate at 36%.

You don’t hear many analysts or investors on conference calls asking about effective tax rates, but what kind of dollar impact would a 1 or 2 percentage point increase – or decrease – in tax rate have on your P&L? Put a calculator to it. Have a conversation with your company’s tax people. Write your congressman.

And consider the potential need for disclosure as new tax policies continue to take shape in Washington.

Happy first day of the rest of your taxable year!

© 2010 Johnson Strategic Communications Inc.

Disclosing ObamaCare’s impact

March 29, 2010

Now is the time (if it wasn’t weeks ago) for investor relations people to get on top of the question: What impact will President Obama’s healthcare overhaul have on our companies?

The ObamaCare question will be asked in first-quarter conference calls and one-on-one conversations, and companies ought to disclose the material impacts either before first-quarter earnings or in their normal reporting.

Already the disclosures have begun to emerge after the president’s March 23 signing of the new government framework for health insurance. For example:

  • AT&T said Friday it will take a $1 billion noncash charge  when it reports first-quarter earnings. In a brief 8-K, the phone company  said the charge reflects loss of a tax benefit for subsidizing retiree healthcare costs. AT&T also said it will review its health benefits in light of the new law and the added tax burden.
  • 3M issued a news release and filed with the SEC on Friday, saying it expects an after-tax charge of $85 to $90 million, about 12 cents a share, when it reports first-quarter results. 3M did a more thorough job of explaining: ObamaCare eliminates a tax benefit for company payments that subsidize retiree prescription drug coverage. Under the new law, the extra tax bite doesn’t hit until 2013, but the change reduces the value of a deferred tax benefit on 3M’s books, so GAAP requires a charge now.
  • Caterpillar filed an 8-K estimating its tax hit at approximately $100 million, again to be recognized in Q1. Deere & Co. estimated its charge at $150 million, AK Steel at $31 million … and we can expect many more.

These filings with the SEC are not about politics, but bookkeeping, of course. Just another development that may require an 8-K and explanation in the next 10-Q. But editorial writers were quick to seize on the announcements as an “I told you so” moment on ObamaCare (The Wall Street Journal here, Investors Business Daily here). And now Congress wants to call these evil companies on the carpet for – the horror – disclosing the cost of the new healthcare law in a timely manner.

Update: The American Benefits Council, speaking for 300 large employers, on Monday called for repeal of the tax increase related to retiree prescription benefits. White House response: Buzz off.

Without wading further into the swamps of Washington, let’s just pay attention to our own duty as investor relations people: Each of us should be asking internally – if we haven’t already – what impact the health overhaul law will have. And how we need to disclose that, either now or with our upcoming quarterly results.

In a broader way, investors will be looking to companies in the biopharma, medical equipment, hospital and other health industries to provide analysis and forward-looking perspective on how ObamaCare will help (or hurt) future results.

© 2010 Johnson Strategic Communications Inc.

Let’s NOT squash trading

January 20, 2010

As you know from reading the papers, Washington “powers that be” have two impulses when it comes to Wall Street and stock market activity:

  • If it’s an activity where people can lose money, we need to regulate it.
  • If it’s a thing where people can make too much money, we need to regulate it – and maybe just outright squash it.

Following the market’s unfortunate meltdown in 2007-09, and the even more unfortunate fact that Wall Streeters who remain are taking home big bonuses, Congress and the Obama Administration are in full rush to “do something.” You know, do something so “this will never happen again.” No one believes that last part – mostly it’s about casting blame and seeming to punish someone – but they are working on a wave of escalating regulation, which could be very real.

Update: On Jan. 21 President Obama pledged to go after big banks, again using that “never again” language. Among other things he proposed a ban on proprietary trading by banks, curbs on advising hedge funds and limits on involvement in “risky financial products.” Depending on how it’s structured, this might greatly reduce trading – or just drive traders out of mega-banks into smaller firms.

Earlier this week the Kansas City chapters of NIRI and the Security Traders Association put on an educational panel, “Not Your Grandma’s Market Anymore,” on how the new world of trading affects public companies. The Jan. 19 audience was a mix of 50 investor relations people, long-term investors and short-term traders, all in one room.

Speakers were Joe Ratterman, CEO of BATS Global Markets, the No. 3 US equity exchange behind Nasdaq and NYSE; Tim Quast, managing director of ModernIR, an analytics firm that tracks trading patterns for public companies; and Jeff Albright, VP and head of equity trading for mutual fund family Waddell & Reed. I moderated.

In another post, I’ll share ideas from the session on what investor relations people can do amid this new world of trading. But let’s start with Washington – because regulatory excess in trading could do a lot of damage to the markets our public companies depend upon. Some examples of what the power brokers are up to:

  • The Securities and Exchange Commission issued a “concept release” on equity market structure on Jan. 14. It’s a good primer on changes in how stocks are traded. The SEC seeks public comment on how to beef up regulation of market structure, high-frequency trading and “undisplayed liquidity” such as the private markets called dark pools. That’s the start of a push for expanded regulation. I’ll post excerpts in a page called “Not Your Grandma’s Market,” but the full 74-page release is worth reading.
  • Democrats in Congress are proposing a new tax of 0.25% to 0.5% on securities transactions – every trade of stocks, options, futures, etc. Proponents say the tax could raise as much as $354 billion a year for Uncle Sam and curb “speculative excess” by cutting total trading volume, say, 25% to 50%. Those last numbers are, well, speculative – no one knows what the actual impact of lobbing a new tax into the markets would be.
  • The SEC proposes to regulate dark pools, whose very name suggests something sinister – should have sent that one to the branding consultant before going with “dark pools.” They’re generally platforms for securities firms to match orders and do proprietary trades without disclosing price and volume offers. The new SEC rules would bring that trading out into the open.
  • Also targeted by the SEC are flash orders. Flash trading essentially is a way automated traders’ computers can get a peek at pending orders from other investors 30 milliseconds before those orders go to the broader market. The fear is that high-tech trading desks are gaining an unfair advantage.
  • And, of course, the SEC has been tinkering with rules on short selling, a hot button for some companies that have felt victimized on the downside of the market – and another unpopular group of Wall Streeters.

Now, the opinions here are my own – I can’t speak for the other panelists. My takeaway from the discussion was that, yes, technological and regulatory changes of recent years have created a huge new realm that basically is automated trading.

Perhaps two-thirds of the trading volume in US stocks is short-term activity. The traders are math majors who program computers to make or withdraw offers from the market, hundreds or thousands of small trades at a time, in milliseconds. They use algorithms to implement strategies based on tiny anomalies in price, or theories about market movement. The activities go by a bunch of acronyms and names like “high-frequency trading.” They use ultra-fast technology.

And, yes, this trading activity makes life complicated – both for public companies trying to figure out what is happening with our stocks day-to-day, and for individual or institutional investors who may be trying to do a trade for long-term investment but encounter a flurry of “noise” moving the price or spiking volume.

The fact that life has become more complicated, however, doesn’t mean it’s worse – or that trading cries out for a regulatory crackdown. Automated trading certainly was not responsible for the financial meltdown we just came through, and those traders Washington likes to label “speculators” aren’t doing anything wrong.

The societal benefit of short-term trading, as it emerged in discussion, is that when a long-term investor is trying to put a trade on – say, buy 50,000 shares of your stock – the automated traders often are the ones putting up the offers that match that bid and form the other side of the trade. Liquidity comes from more offers, and this lubrication enables people to own stocks less risk of being stuck.

My bottom line: Let’s NOT squash trading. Taxing trades will only add costs, ultimately borne by the people who own equities or mutual funds. And we ought to be very careful about dictating market structure based on an understanding of today’s needs and technologies – which tomorrow will already be changing.

Capitalism thrives in free markets. Rigidity in capital markets will inhibit the flow of money and hinder investment in new technologies yet to be envisioned. And let’s face it, the equity markets (however bumpy) ultimately enable businesses to exist, grow … or in some cases disappear. We don’t want to lock in the status quo.

That’s my two-cents’ worth. What’s your opinion of regulating trading?

© 2010 Johnson Strategic Communications Inc.