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A Capital Idea from Microsoft
by Larry Kudlow (archive)
July 23, 2004 Print Send

The stunning Microsoft decision to return more than $75 billion in cash to shareholders over the next four years is a smashing endorsement of the importance of President Bush’s pro-growth tax cuts. It is also a tremendous boon to investors, who will recycle this windfall into thousands of businesses both large and small -- a process that will significantly increase new jobs and grow the economy.
The Redmond, Washington-based software maker intends to pay a special $3 dividend for every investor share, for a total of $32 billion. Additionally, Microsoft will double its annual dividend and buy as much as $30 billion of its own stock over the next four years. If this new policy raises the Microsoft share price -- as is likely -- then the total package could be worth over $100 billion to shareholders.
Ironically, Microsoft’s corporate decision, induced by supply-side tax cuts, will also provide a huge Keynesian injection of fiscal stimulus to the economy, one that will more than offset the temporary effects of higher energy costs on consumer purchasing power. Even better, this sea-change policy will ripple through corporate America, forcing public companies to take similar actions.
When President Bush launched his initiative to equalize the tax rate on capital gains and investor dividends at 15 percent, there was a derisive outcry. Mainstream thinkers claimed the plan would only benefit the rich and have no impact on economic growth or jobs. Now that the economy -- led by business investment -- is growing at the fastest pace in two decades, the liberal establishment may wish to rethink its position.
Basically, the Bush plan significantly reduces Uncle Sam’s tax bite on profits and investment capital, leaving more in private hands for channeling into job-creating businesses. Remember, both dividends and capital gains are taxed at the corporate level, the individual level, and as capital gains. While this triple taxation of capital was not eliminated, the tax penalty was substantially lowered. As the capital-gains levy was cut from 20 percent to 15 percent on the marginal dollar, the dividend rate was reduced at the top income level from 40 percent to 15 percent. Meanwhile, personal income-tax rates were reduced across the board.
The charge that this policy would only benefit the rich is patently false. A recent Zogby poll shows that a substantial 59 percent majority of investors has a portfolio valued at less than $100,000. In addition, 28 percent of investors earn a modest $50,000 to $75,000 a year; another 19 percent earn $35,000 to $50,000; and 7 percent earn less than $35,000. According to Zogby, “The majority of investors earn less than $75,000. . . . This helps explain why old-fashioned [class-warfare] populism does not work in political campaigns nationwide.”
Steady dividend flows over time reduce equity risk and add enormous investor protection for retirement and other purposes. So what we’re seeing now is a return to the old-time religion of investing for both dividends and capital-gains returns.
According to the American Shareholders Association, investor wealth has increased $2.2 trillion, or 25 percent, since May 20, 2003, the start date of the Bush policy. So far this year, 161 of the S&P 500 companies have raised or initiated dividends. According to Standard & Poor’s, year-to-date dividend-paying issues in the S&P 500 index are averaging a 4.8 percent gain while non-dividend payers are down 3.5 percent.
Professor Jeremy Siegel of the University of Pennsylvania calculates that stock market returns including dividends have produced a 7 percent annual increase (adjusted for inflation) over long periods of time. But dividends fell behind in the last two decades because capital gains were taxed at a lower rate. Now, however, with a sharp reduction of the double-tax on dividends, dividend issuance is more efficient, with corporate payout policies more often based on the economics of a decision than just the tax consequence. Stock buybacks now have equal footing with dividend issuance. At lower tax rates, CEOs also have an incentive to pay out more cash to shareholders, rather than build internal empires or make unwise investment decisions.
In effect, the new law democratizes corporate governance. It puts real financial power into the hands of the shareholder constituency and removes it from the corpocratic front office.
Bush critics -- especially Kerry and Edwards, who wish to overturn the Bush policy -- fail to understand that reducing the double and triple taxation of investment capital is a business-funder, job-creator, and economic-grower. Simply put, capital is the best friend of both businesses and workers.
Bush’s policies make more capital available by reducing its after-tax cost and raising its post-tax investment return. When it is more profitable after-tax to invest, the mighty investor class will do so. And by supplying ever more capital to business and the economy, 90 million investors will expand America’s virtually unlimited potential to grow, create jobs, and prosper.