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I've seen some discussion that for emergency support, dividends should be treated the same as wages.
I'm going to get to that, but let's start this thread by defining a key concept: arbitrage.....
I'm going to get to that, but let's start this thread by defining a key concept: arbitrage.....
"Arbitrage" means to take advantage of price differences across markets. If the same bundle {product, location, timing, state of the world} has different pricing, you can engage in 'arbitrage' transactions. Buying low and simultaneously selling high.
https://www.investopedia.com/terms/a/arbitrage.asp
https://www.investopedia.com/terms/a/arbitrage.asp
Arbitrage can be 'pure', meaning the bundle is *exactly* the same exact for price. Or it can involve a bit of a different bundle in terms of {product,location,timing,state of the world}. If impure arbitrage, the arbitrageur takes on a bit of risk.
Now what about tax arbitrage?
Now what about tax arbitrage?
The term "tax arbitrage" is used when two different ways of organizing a transaction attract different tax treatment.
Again, such arbitrage can be 'pure' or 'impure', depending on exactly how similar the two ways of doing the transaction actually are.
https://www.investopedia.com/terms/t/tax-arbitrage.asp
Again, such arbitrage can be 'pure' or 'impure', depending on exactly how similar the two ways of doing the transaction actually are.
https://www.investopedia.com/terms/t/tax-arbitrage.asp
Another example of arbitrage is 'regulatory arbitrage', which refers to doing a same/similar transaction under different regulatory regimes that entail different costs.
https://www.investopedia.com/terms/r/regulatory-arbitrage.asp
https://www.investopedia.com/terms/r/regulatory-arbitrage.asp
Ok, so that's arbitrage (same product bundle; different price).
Let's apply this arbitrage concept--and how it can go wrong--to the current COVID crisis.
The key is that arbitrage is often imperfect. The product bundle isn't *exactly* the same in all states of the world....
Let's apply this arbitrage concept--and how it can go wrong--to the current COVID crisis.
The key is that arbitrage is often imperfect. The product bundle isn't *exactly* the same in all states of the world....
Take the example of cruise ships, which often fly under 'flags of convenience'. Why do they do this? Regulatory arbitrage and tax arbitrage. They can still sail the high seas no matter the flag, but can do so more cheaply under a "flag of convenience".
https://en.wikipedia.org/wiki/Flag_of_convenience
https://en.wikipedia.org/wiki/Flag_of_convenience
So, 'flag of convenience' for cruise ships is a tax/regulatory arbitrage play.
BUT, it is imperfect. Why? Because in some state of the world, the payoffs do actually depend on the ship's flag.
Like, for example, when there are business relief packages. https://fortune.com/2020/03/27/coronavirus-bailout-cruise-ship-industry-covid-19/
BUT, it is imperfect. Why? Because in some state of the world, the payoffs do actually depend on the ship's flag.
Like, for example, when there are business relief packages. https://fortune.com/2020/03/27/coronavirus-bailout-cruise-ship-industry-covid-19/
In the current crisis, many voices have noted that if you don't sail under a US flag in good times, you sure as heck shouldn't benefit in bad times.
I don't know I often agree with @dailykos , but you can find that sentiment here: https://www.dailykos.com/stories/2020/3/23/1930451/-Let-them-die-Foreign-flagged-cruise-lines-have-no-business-asking-for-a-U-S-bailout-now
I don't know I often agree with @dailykos , but you can find that sentiment here: https://www.dailykos.com/stories/2020/3/23/1930451/-Let-them-die-Foreign-flagged-cruise-lines-have-no-business-asking-for-a-U-S-bailout-now
So, foreign flagged cruise ship companies are learning a lesson on the tail risk of an arbitrage play. In some states of the world (like a huge pandemic), the 'package' you get by flying under one flag or another can differ a lot.
Now, let's turn to wages vs. dividends....
Now, let's turn to wages vs. dividends....
Dividends are paid as a residual return to shareholders after paying expenses and taxes.
Wages are compensation for labour.
The $'s eventually buy the same things, but we treat wages and dividends differently for taxation in many ways. EI, CPP, dividend tax credit, etc.
Wages are compensation for labour.
The $'s eventually buy the same things, but we treat wages and dividends differently for taxation in many ways. EI, CPP, dividend tax credit, etc.
Some firms are operated by the owner. The owner/operator contributes both capital and labour.
Such o/o firms have the luxury of a large degree of choice: pay dividends or pay wages?
Often this is presented as a tax arbitrage opportunity: which is taxed less, wages or dividends?
Such o/o firms have the luxury of a large degree of choice: pay dividends or pay wages?
Often this is presented as a tax arbitrage opportunity: which is taxed less, wages or dividends?
In the COVID crisis, many of the programs (CEWS/CERB/CEBA) are keyed to wages.
Why? Because the prime policy goal is to support jobs, not offer capital a free government-written put option to cover capital's losses.
Why? Because the prime policy goal is to support jobs, not offer capital a free government-written put option to cover capital's losses.
So, choosing to pay out dividends instead of wages for an o/o firm was sold as a pure tax arbitrage play.
What we see in this crisis is govt programs are not treating wages and dividends the same. So, the tax arbitrage is impure in the state of the world (COVID!) that obtained.
What we see in this crisis is govt programs are not treating wages and dividends the same. So, the tax arbitrage is impure in the state of the world (COVID!) that obtained.
I've seen some people argue that we *ought* to be treating dividends the same as wages for these emergency programs.
E.g. https://twitter.com/CFIB/status/1248260194838118400
Should they be?
E.g. https://twitter.com/CFIB/status/1248260194838118400
Should they be?
Should wages and dividends be the same for CEWS/CERB/CEBA?
I argue no.
Wages and dividends are taxed differently in regular times for a *reason*.
Dividends get preferential treatment. You can't scoop the tax savings in good times, then argue it's all the same in COVID times.
I argue no.
Wages and dividends are taxed differently in regular times for a *reason*.
Dividends get preferential treatment. You can't scoop the tax savings in good times, then argue it's all the same in COVID times.
Arguing that dividend recipients should get support just like wage earners is therefore just like the Liberian-flagged cruise ship operators begging for a govt bailout.
You scooped the gains in good times; you take your chances in bad times. https://fortune.com/2020/03/27/coronavirus-bailout-cruise-ship-industry-covid-19/
You scooped the gains in good times; you take your chances in bad times. https://fortune.com/2020/03/27/coronavirus-bailout-cruise-ship-industry-covid-19/
Last point: I love capitalism; especially small biz. These folks word very hard, and I hope the govt offers a solid fiscal bridge across the crisis so that our businesses thrive when the crisis abates.
But my love does not extend to a free govt-written put option on dividends.
But my love does not extend to a free govt-written put option on dividends.
