Lack of income for seniors is a distortion of the tax system

Lack of income for seniors is a distortion of the tax system

Wall Street Journal Letter to the Editor

In “Memo to the Fed:  First, Do No Harm (June 15, 2015),” Jim Kudlinski states that “superlow rates and QE have distorted our markets, benefiting borrowers at the expense especially of seniors and others desiring reasonable returns from conservative investments.” Distorted markets, however, are more a function of a tax regime that allows for deduction of interest expense and not dividends. 


The cost of capital consists of both the cost of debt and the cost of equity.  Why treat them differently from a tax perspective? 


Preferred equity offers structurally higher rates than bonds because it occupies a different segment of the capital structure. Even in today’s zero interest rate environment, for example, Wells Fargo offers an investment-grade, A-rated preferred equity with a 7% current yield that is not callable until December 2017.


But corporate boards rarely issue preferred equity because dividend payments are not tax advantaged like debt, and financial advisors rarely put clients into preferred equity because of this lack of liquidity. 


Tax deductibility of dividends would help revive this vital segment of America’s capital structure to give savers and seniors high income in a low-rate environment without putting their capital at undo risk.   
 

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