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At the Top, Pennies Per Share Add Up

Companies Boost Dividends After Tax Cut

By Jonathan Weisman
Washington Post Staff Writer
Friday, April 8, 2005; Page E01

Like many companies in Silicon Valley, Xilinx Inc. liked its cash -- for expansion, for investment and for stock buybacks that boosted its share prices. But when Congress and President Bush slashed the tax rate on dividends in 2003, the San Jose chipmaker had a change of heart.

Last April, for the first time, Xilinx offered shareholders a quarterly dividend of 5 cents. As of June, company president, chairman and chief executive Willem P. Roelandts held 3.66 million shares, which would allow him to reap nearly three-quarters of a million dollars in the dividend's first year. His tax savings, thanks to the dividend cut, could total $172,913.

A Corporate Boon Here are the companies with the largest increase in dividends to top executives in 2003.

"To be honest, what helped [the decision] was the Bush reduction in dividend taxes," said Maria Quillard, senior director of investor relations at Xilinx. But, she hastened to add, Roelandts's windfall "never entered into our equation, never." She said, "Our CEO is a very humble guy. He drives a [Ford] Taurus."

Two tax seasons after the dividend tax cut went into effect, its impact on corporate behavior and investors' taxes is beginning to come into focus. Since 2003, 37 companies in the Standard & Poor's 500-stock index have declared initial dividends, according to Howard Silverblatt, an analyst at Standard & Poor's. Last year, a total of 247 S&P 500 companies significantly boosted their dividends.

Personal income from dividends climbed to $441 billion last year from $393 billion in 2003 and $388 billion in 2002, according to the Commerce Department.

While the benefits were widely spread, new research suggests the increased dividends were motivated at least in part by the self-interest of America's corporate titans. Companies with stock ownership concentrated among a few top managers have been the most likely to initiate dividend offerings or substantially increase dividend values in the wake of the tax cut.

"I was not at all surprised by the finding, because I'm one of those economists that believes people respond rationally to incentives," said University of Illinois professor Jeffrey R. Brown, a former senior economist in the Bush White House who co-authored one of the new dividend studies. "If anything, I may have been surprised by how robust the response was. It was definitely there and very strong."

When Bush first proposed eliminating what he called the double taxation of dividends, supporters said the move would be a boon to shareholders and the economy at large. With little to no tax penalty in their future, shareholders would pressure companies hoarding cash to dole out that money as dividends, injecting a much-needed cash infusion into consumers' wallets. Executives would be less likely to use cash in the corporate kitty for the kind of abuses that had come to light in scandals like that at Tyco International Ltd. Instead of manipulating stock prices with share repurchases, companies would have to focus on steady, fundamental growth to keep the dividends flowing.

But opponents said the proposal would be a windfall for the affluent, expanding the already growing gap between rich and poor. Congress did not accept the president's proposal wholesale, instead cutting the tax rate on dividends from a maximum 38.6 percent to 15 percent, while lowering the tax rate on most capital gains to 15 percent as well, a cut of unparalleled magnitude, according to a paper by Jennifer L. Blouin of the University of Pennsylvania and Jana Smith Raedy and Douglas A. Shackelford of the University of North Carolina at Chapel Hill.

The 2003 tax cut's income tax component sliced the top tax bracket from 38.6 percent to 35 percent, but with so much of their income coming from dividends and capital gains, the wealthy had their effective tax rate fall far more than that. That year, the joint Urban Institute-Brookings Institution Tax Policy Center estimated that 46 percent of the benefits of the dividend and capital gains tax cuts would go to the 0.2 percent of households with incomes over $1 million this year. Nearly three-quarters of the benefits were projected to go to the 3.1 percent of households making more than $200,000.

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