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What Corporate America Knows About the Fiscal Cliff

By Deborah Solomon
November 29, 2012 12:21 PM EST

Republican House Speaker John Boehner didn't sound too optimistic today when he said "no substantive progress" had been made toward averting the fiscal cliff, despite a full-court press by the White House that included a meeting with Treasury Secretary Tim Geithner and a Wednesday night phone call with President Barack Obama.

That pessimism may have spooked the stock market, which pared gains in response, but it's no surprise to corporate America.

A wave of companies has begun boosting dividend payouts in recent days, spurred not by the generosity of the holiday season but by the very real threat that taxes on investments may rise on Jan. 1, 2013.

Walt Disney Co. (DIS), Costco Wholesale Corp (COST)., Dillard's Inc (DDS)., Las Vegas Sands Corp (LVS). and Wal-Mart Stores Inc (WMT). are among those either issuing special dividends or moving up payouts from 2013 to this year.

The reason is the scheduled expiration of the Bush tax cuts, which not only slashed marginal tax rates but also cut the rate on investment income from capital gains and dividends to 15 percent. If lawmakers are unable to strike a deal by year-end, capital gains will revert to a 20 percent tax rate and dividends will be taxed as ordinary income -- with the wealthiest paying about 40 percent.

Companies, many of which are sitting on huge amounts of cash, are trying to return some of that to investors before they get hit with a massive tax bill. (If tax rates rise, expect to see corporations buying back their own shares, which is another way to enrich shareholders since it makes what they own more valuable by reducing the number of company shares outstanding.)

Corporate America sees the writing on the wall and it says tax rates will undoubtedly go up on investment income -- even if a deal is reached. (It's telling that chief executives meeting with Obama and lawmakers this week emerged saying they're willing to accept higher income taxes to avert the fiscal cliff.)

Lawmakers may still come to agreement to prevent some or all of the $607 billion in tax increases and spending cuts slated to take effect next year. A deal could take the form of a short-term patch to blunt the economic blow of taxes increasing on everyone. Or it could be a longer-term deficit-reduction agreement that tackles spending, taxes and entitlement reform.

Regardless, it's only a matter of time before investment income is taxed at a higher rate -- at least for the wealthiest. It's too enticing a revenue source for lawmakers to pass up. Preferential rates on cap gains and dividends overwhelmingly benefit the wealthy -- 96 percent of the tax savings in 2011 went to those in the top income quintile, according to the Tax Policy Center. Increasing capital gains taxes to 20 percent and taxing dividends as ordinary income for upper-income individuals  -- something Obama has proposed -- would bring in about $242 billion over the next decade, according to the U.S. Treasury Department.

Corporate America clearly isn't waiting for Congress to reach an agreement that keeps investment taxes low. So if you're a shareholder in a dividend-paying company, expect a generous holiday gift this year.

(Deborah Solomon  is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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