There are people in the world who can't lose for winning. Consider Peter B. Lewis, the billionaire chairman of Progressive Insurance, who has spent more money than anyone else trying to defeat George W. Bush this November. Lewis, a major backer of MoveOn.org and America Coming Together, two leading anti-Bush outfits, doesn't like Bush's domestic or foreign policies -- but he stands to benefit big-time from a controversial tax-policy change that Bush shoved through Congress last year.
Talk about irony. A successful liberal Democratic capitalist-fiscal conservative-libertarian such as Lewis likely benefiting from the policies of an administration he's trying to unseat.
Now, it's going to take a few steps to explain all of this, so please bear with me. Here's the deal. Progressive, an auto insurance company, is offering to buy back 8 percent of its stock in a so-called "modified Dutch auction," paying from $78 to $88 a share. Lewis, at the company's request, has agreed to offer Progressive 1.1 million of his shares, about 6 percent of his stake. This would net him $96.8 million if he sells all those shares at the top price.
Now, for where the tax change comes in. Because Lewis's ownership percentage in the company is slated to rise as a result of the transaction, says Lehman Brothers tax expert Robert Willens, the money Lewis gets from Progressive for his stock would be considered a dividend rather than sale proceeds. Under the pre-Bush tax rules, dividends were taxed at the top tax rate, currently 35 percent. But now, thanks to the tax cut that Bush pushed through Congress last year, dividends are taxed at a top rate of only 15 percent -- the same as capital gains. So if Lewis sells all 1.1 million shares at $88, he'll save just under $20 million in federal taxes. (The math: 20 percent saving multiplied by his proceeds.) We won't know how many shares Lewis will sell or at what price until after the Dutch auction is completed next month. But we do know that he's set to save serious money because of the favorable tax treatment of dividends.
"There's no way in the world he would have sold in this transaction under the old tax rules," Willens says. "He would have just kept on selling his stock in the open market, where his proceeds would have been taxed at the [lower] capital gains rate."
The company wants Lewis to sell stock in the tender offer because his 1.1 million shares increase the chance of the company getting the 17.1 million shares it wants. In addition, his participation may hold the price the company will pay below what it would otherwise be. "Our goal is to return about $1.5 billion to our shareholders through a repurchase," says treasurer Tom King. "Peter is one of our largest shareholders, and having more sellers helps us."
And now, a disclosure detour. I own a small stake in Progressive; the Sequoia Fund, one of Progressive's big stockholders, is in The Washington Post Co.'s 401(k) plan; and my family owns stock in Selected American Shares, another of Progressive's major holders. No one pitched me the idea for this column: I developed it after reading documents Progressive filed at the Securities and Exchange Commission last week.
Back to the main event. I couldn't get any comment from the media-shy Lewis about how it feels to be benefiting personally from the tax policies of a man he opposes. I'm not accusing Lewis of hypocrisy -- I just find the whole situation funny. I'm not giving back the money I'm saving from Bush's dividend-tax cut, which I opposed. There's no reason Lewis should, either.
For all the talk of big money in politics, you can see from Lewis's potential tax savings here that political money is small change when it comes to serious money. Lewis, who at 70 has become a philanthropist, giving away more money than most of us can ever imagine, has become the No. 1 anti-Bush donor in this election cycle by forking over $14.2 million. George Soros is No. 2, at $12.6 million, according to the Center for Responsive Politics.
Think about it: $14 million in political donations, a likely $20 million tax saving. Lewis could pay for his donations with the money he stands to save from Bush's tax cuts on just this one transaction. It's as if Bush had the Treasury give Lewis the money he's using to try to get rid of Bush. If you don't find this funny, politics has probably destroyed your sense of humor.
Washington Post staff researcher Richard Drezen contributed to this column. Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.