IBM Rides the Laffer Curve

IBM has $15 billion extra dollars that it doesn't need, so naturally it is looking to return that money to its rightful owners, its shareholders. It could pay it out in dividends but dividend levels are hard to reverse, so when taxes on divs go up in 2010, investors will get socked. Granted they could pay out a special dividend now to take advantage of the current rate. However, a 15% tax is still a 15% tax, and if you've discovered a nifty little financial innovation that allows you to return money to shareholders at the lowest possible tax rate, 0%, why not take that option?

Personally, I'd rather have the cash, but financially there is not too much difference between a dividend and a share repurchase. Don't think that these maneuvers and other ploys aren't going to proliferate as we get closer to the expiration of the 2003 tax cuts. Investors won't be happy, but, believe me, they will adapt. They will keep as much of their money out of the government's hands as is legally possible and the government will be worse off for not understanding the negative Laffer effect.