The wealthy look set to enjoy a windfall in the closing weeks of the year as companies push money out the door to beat the higher tax rates advocated by President Barack Obama.
More than 150 companies, from Costco Wholesale Corp. to Las Vegas Sands Corp. (LVS), have declared special dividends totaling about $20 billion this quarter to avoid anticipated tax increases in 2013, according to data compiled by Bloomberg. Others, including law and private-equity firms, probably will pay bonuses, partnership distributions and commissions early for tax reasons, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
“We’re going to have a big jump in household income in the fourth quarter” said Crandall, whose company is a subsidiary of ICAP Plc, the world’s largest broker of transactions between banks. “It’s going to be in excess of $50 billion.”
Much of that will go to upper-income Americans, the very people Obama has targeted to pay higher taxes, including Las Vegas Sands controlling shareholder and Chief Executive Officer Sheldon Adelson.
Reports in Europe today showed French business confidence and industrial production unexpectedly declined as President Francois Hollande grapples with a budget deficit and an economy that is on the verge of recession.
U.S. households probably will have their incomes squeezed next quarter as a temporary payroll-tax cut expires and emergency unemployment benefits are scaled back, Feroli said.
And unlike the year-end boost to incomes, the hit to paychecks in 2013 will affect spending and the economy — for the worse — because cash-strapped Americans will feel the pinch, he added. He reckons that budget belt-tightening on the federal, state and local levels will shave two percentage points off growth next year. The economy will expend 1.7 percent in 2013, after climbing 2.2 percent this year, according to Feroli.
Obama has said an increase in tax rates on income above $200,000 for individuals and $250,000 for married couples must be part of a deal to prevent the rest of the more than $600 billion in automatic spending cuts and tax increases from taking effect in 2013.
Under the president’s proposal, the top statutory tax rate on ordinary income would reach 39.6 percent, up from 35 percent, and the top rate on capital gains would be 23.8 percent, up from 15 percent. The maximum rate on dividends would go to 43.4 percent from 15 percent.
The government stands to benefit from higher revenue in the short run as companies and investors position themselves ahead of the end of the year. In the long run, the government might suffer, said Eric Toder, co-director of the Tax Policy Center in Washington.
The IRS will collect taxes on dividends that might not have otherwise been paid out when 2012 tax returns are filed. The Treasury Department also will enjoy higher revenue from capital gains taxes as investors unload shares to lock in profits before a possible rate rise in 2013.