Remember the days when corporate executives were paid in stock options? Well, those days won't be with us for long. Although it's doing a bit better than it was, the stock market is not exactly roaring. An option to buy a share of stockat last year's price is not a terrific deal when this year's price is even lower.
But now, courtesy of the new tax law, we are about to see the dawn of a new dayof executive compensation. Stock options are out. Preferred shares paying generous dividends are in.
You see, the new tax bill cuts taxes on dividends to just 15 percent. That's less than half the top tax rate on regular income. So if you're a corporate executive, and you don't want to be paid in stock options because your share prices are going nowhere, and you don't want to be paid a regular salary, because more than 30 percent of that is subject to the income tax, here's a wonderful solution: Get your company to start paying generous dividends on its preferred shares of stock. And you get paid in preferred shares. Presto! Your tax bill is only 15 percent. It's the tax shelter of all tax shelters.
By the way, the tax bill the Bush Administration originally sent to Congress would have cut taxes on dividends only for companies that paid taxes on companyearnings. You remember the argument about double taxation. Well, you'll be pleased -- or perhaps outraged -- to learn that the new tax law that was just signed eliminated that requirement.
So now it's possible for companies to use all sorts of tax-avoidance schemes --say, a tax shelter in Bermuda -- while still paying out dividends at the new low 15 percent tax rate. In other words, a tax shelter for the corporation and a tax shelter for executives who will now get paid in dividends.
It's a win-win. And it's also a win for tax attorneys. They'll be busy dreamingup even more shelters. That's because the new tax law also reduces the top capital-gains rate from 20 percent to 15 percent. Which means even more incentive for high-paid people to convert their ordinary income into income taxed at the lower capital-gains rate.
Of course America still has to pay for the war on terrorism, and homeland security, and baby boomers who are soon to collect Social Security and Medicare. And who knows where the money's going to come from?
At a time when every politician is talking about patriotism, apparently there'snot enough of it to guarantee that everyone pays their fair share to keep America going.
