Bush's Tax-Cut Proposal Would Benefit Some CEOs

Washington Post

When President Bush announced his plan to eliminate the tax on corporate dividends, he said he was doing so in part to help senior citizens who rely on the quarterly checks for steady income. But among those seniors would be the likes of Citigroup Chairman and Chief Executive Sanford I. Weill, who could stand to save about $6.9 million in taxes under the plan.

Some of the biggest potential winners under the Bush plan would be top executives at dividend-paying companies who own big blocks of their firm's shares.

Walt Disney Co.'s Michael Eisner, for instance, owns about 14 million company shares, a spokesman said. Disney announced an annual dividend of 21 cents a share this month, which adds up to about $2.9 million for Eisner. Under the current tax code, assuming Eisner is in the highest personal income tax bracket, the Disney chairman and chief executive would pay about $1.3 million in state and federal taxes on that amount, according to a tax expert at a major accounting firm. Under the Bush plan, he might pay nothing on that portion of his income.

Of course, any investor owning a large block of stock in a profitable, dividend-paying company would enjoy big tax savings under the plan. But chief executives have suffered two years of brutal headlines describing exorbitant compensation and benefit packages, benefits that in many cases continued to flow even as their firms' share prices and profit margins plummeted.

"The beneficiary will not be the small investor but the guy holding a million shares," said Joe Goodwin, chief executive of the Goodwin Group, an executive search and board consulting firm in Atlanta. "It will be a windfall for some CEOs and other corporate officers."

In many cases the windfall could be large, though coming up with precise figures is difficult without knowing each executive's exact tax-paying status. A Citigroup spokeswoman said Weill owns about 22.8 million shares in the financial-services firm, which paid dividends of 18 cents a share three times last year and 16 cents once. That would have earned Weill about $16 million. Under the Bush plan, he could save as much as $6.9 million in taxes.

Many other executives also would do well. Coca-Cola Co. CEO Douglas Daft owns about 2.5 million shares in the company, according to a spokeswoman. Coke paid 80 cents a share in dividends last year, which would have earned Daft about $2 million based on current holdings. Under the Bush plan, he could save about $875,000 in taxes. But Coke's most recent proxy statement indicates that 364,500 of Daft's shares were in the form of options, which do not pay dividends. Some of Daft's shares were described in the March 2002 proxy as dependent on performance and other restrictions, which could limit his potential tax savings.

Washington Post Co. Chairman Donald E. Graham would benefit under the Bush plan as well. With the Post's 2002 dividend of $5.60 a share, Graham could have saved $1.9 million.

For some CEOs, the benefit would be less. General Electric Co. Chairman and CEO Jeffrey R. Immelt, for instance, owns 199,772 GE shares, a spokesman said. The firm paid a dividend of 18 cents a share each quarter last year (and increased its dividend to 19 cents this month). Immelt would have saved about $62,000 last year, based on current holdings.

Tax experts note that for firms and their executives to qualify for the tax break, the firms must have paid tax on the profit they distribute as dividends. Financial filings and interviews with company representatives suggest that Weill, Eisner, Daft, Graham and Immelt would have qualified for the dividend tax breaks in 2002 based on taxes paid by their firms in 2001. But corporate watchdog groups note that these numbers are very hard to nail down and that companies' tax liabilities can shift substantially from year to year.

Some companies, meanwhile, manage their finances to limit their tax exposure. Some strategists suggest that this practice may change as firms instead decide to pay tax on profit to reward shareholders with tax-free dividends. Conceivably, executives with large stock holdings at firms that now strive for tax efficiency could face a conflict of interest, seeking to increase their firm's tax payments -- regardless of that strategy's effect on the firm and shareholders -- to generate tax-free dividends.

But Dorothy Coleman, vice president for tax policy at the National Assn. of Manufacturers, said such a worry was speculative and not likely to emerge as a significant problem.

Advocates for stricter corporate governance practices have mixed feelings about the Bush plan's potential for windfalls. On one hand, most support the notion of encouraging firms to pay dividends, because doing so can impose stricter fiscal discipline. For instance, draining off excess profit can discourage firms from using free cash flow for ill-advised expansion efforts. Companies that pay dividends also have generally outperformed those that don't, creating more shareholder value.

But executive pay has exploded in recent years, even at companies that have performed poorly, and corporate reformers are generally not inclined to support measures that put more money in executives' pockets.

Kevin J. Murphy, a professor and corporate governance expert at USC, said some of the biggest executive pay packages in recent years have come from newer firms, such as technology companies, that do not pay dividends. Theoretically, those CEOs would not benefit under Bush's proposal. But they could get a break when they sell their shares, since the plan includes a sizable cut in capital gains taxes.

Still, one Wall Street banker said this week that he had heard from several executives at non-dividend-paying companies eager to see their firms start cutting quarterly checks.

"Some will be very much in favor of paying dividends now because they stand to do very well," Murphy said.

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