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Gaming the Fiscal Cliff
Politics, profit, and pageantry

Costco CEO Craig Jelinek

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Kevin D. Williamson

Mr. Sinegal, like many corporate executives, took a relatively small salary, true enough, but received the majority of his multimillion-dollar annual income in equity-based compensation, meaning that he, like Mitt Romney and many a hedge-fund guru, paid 15 percent on most of his money. And while at least one Wall Street analyst has been critical of the firm’s generous compensation for its employees, Wall Street has hardly demanded anything of Costco other than continuation of its very profitable operations. This is partly out of appreciation for the fact that Costco’s customers are relatively wealthy — many are small businesses, and their average income is more than $80,000 a year — and that affluent shoppers have different expectations than do the relatively poor people who shop at Walmart. That’s Costco’s interesting niche: It’s a discount store for rich people, Starbucks to Walmart’s Dunkin Donuts. That strategy has been paying off: Institutional investors such as Warren Buffett’s Berkshire Hathaway are among Costco’s top shareholders, and Buffett has never been shy about making his demands known to management.

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In fact, Buffett’s company, along with Mr. Sinegal, Mr. Jelinek, and other shareholders such as the Bill and Melinda Gates Foundation, are about to see a big payday from Costco — courtesy of Democrats and the fiscal cliff. As noted before, if the president gets his way, the capital-gains tax rate will go up to 20 percent for investors earning $250,000 or more. If nothing is done, the rate will go up to 20 percent for most investors — and more important, income from dividends will be taxed like ordinary income, meaning a top rate of 39.6 percent. That’s a big hit, so Costco is paying a big dividend — right now, before the new rates kick in.

In fact, Costco is set to pay out some $3 billion in a special year-end dividend this year to evade a January tax hike. The biggest single beneficiary will be Mr. Sinegal, the firm’s largest individual shareholder. He stands to gain $14 million. Institutional investors such as Berkshire Hathaway and the Gates Foundation will bring in many millions. That dividend will be made possible in part by a special debt offering. When a firm run by Mitt Romney does this, Democrats call it “vulture capitalists loading up companies with debt in order to write themselves big paychecks.” When companies that make friendly noises about Barack Obama do it, they get a personal visit from the vice president.

There is nothing unethical or illegal about what Costco is doing. In fact, there is a very good argument that this probably is the right thing to do: There is no need to inflict unnecessary costs on shareholders, the company is superbly managed, and its strong financials mean that it can borrow money at very low cost. It is taking a bet that the Obama administration and its friends in the Fed will be keeping borrowing costs low, but that is a fairly safe bet. Other companies offering unusual year-end dividends to beat the taxman include Las Vegas Sands, Movado, and Sturm Ruger. It is widely assumed that George Lucas had the fiscal cliff in mind when he sold Lucasfilm to Disney — by closing the deal this year, he’ll save some $400 million in taxes.

When conservatives talk about “uncertainty,” this is precisely what we mean. We have Costco and Warren Buffett and George Lucas jumping through all sorts of hoops because nobody knows what exactly is going to happen with taxes in the next month or two. They are dedicating their energy to anticipating and reacting to politics, rather than to improving their retail operations, seeking out new opportunities, or destroying beloved cinematic trilogies, respectively. In a stable, predictable environment, Costco might have found a more productive use for that $3 billion. Or it might not — but politics, not production, is in the driver’s seat here. Washington gets to have its little opera, and businesses have to react or try to influence the process. And what about Costco’s small-fry competitors, the ones without the scale to tap the credit markets on easy terms in order to cash out ahead of the tax hike? The political churn just gives them that much more of a disadvantage in the marketplace, without even the cold comfort of a visit from Joe Biden.

Meanwhile, the debt piles up. Washington kicks the can down the road, oblivious to the fact that the road has an end.

— Kevin D. Williamson is a roving correspondent for National Review.



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