The Dividend Tax Canary – WSJ

Financial markets have breathed easier at the prospect that a GOP Senate means no big tax increases in 2021. But Republican control still isn’t certain, and one signal of caution to watch are companies issuing special dividends by the end of the year.

Costco last week announced a one-time dividend of $10 a share for an outlay of some $4.4 billion. The dividend is payable on Dec. 11. Costco has issued special dividends before, and it mentioned no political motive in the timing of the payout.

But the dividend date this calendar year means that Costco’s holders will pay the current top tax rate on dividends of 23.8%, including the ObamaCare investment surcharge. If the wholesaler waited until next year, the tax on dividends could be much higher.

Joe Biden has proposed raising the tax rate on dividends to the regular income tax rate that he also wants to raise to 39.6%, plus the ObamaCare surcharge. That would be a little less than double the current dividend tax rate. Mr. Biden also wants to raise the corporate tax rate to 28% from 21%, which all adds up to a huge tax increase on capital. Corporate profits are taxed twice—first as corporate profits, then as dividends.

Daniel Clifton of the Strategas Group points out that more than 1,100 companies paid special dividends in late 2012 ahead of Barack Obama’s big 2013 tax increase. A similar surge is possible if polls begin to trend away from the two GOP candidates in the Jan. 5 runoff elections in Georgia. Mr. Clifton reports that the number of Russell 3000 companies paying a special dividend is already up 45% from a year ago.