A Curmudgeon's Notebook: Double Taxation on Dividends

2012 February 22
Click History for a list of changes and updates.

Currently, dividends is double taxed. The first tax is on the company that pays on its business income at business or corporation rates. The second is paid by the owner of stock on the dividend income received.

As part of the Bush tax cuts, the tax rate on dividend income was reduced to 15%. The beneficiaries of the reduced personal tax rate to 15% are the owners of stock — primarily the wealthy.

The continuation of this post discusses the double taxation issue and some of the effects of the reduction in tax rate on dividends to 15%. Changes in the tax code have consequences — some intended, but others unintended.

Don Nordeen
==========
Continue reading Double Taxation on Dividends.

Key Words: dividends, tax rates, double taxation, public policy, tax code

Click Continue for Post Continuation plus Comments. Or Click Show All for Above plus Post Continuation and Comments.

Double Taxation on Dividends (continued)

Other posts on tax reform include:

and are part of the basis for this post.

The double taxation on dividend income is one of the factors undermining US competitiveness. The important question is how to eliminate the double taxation in a way to benefit the country, and not to provide special benefits to some group of taxpayers.

Obama's Dividend Assault | WSJ
Wall Street Journal, 2012 Feb 22

The chart to the left shows how changes are made in response to changes in the tax codes. After the tax rate change to 15% on dividends, a company's stock becomes more attractive if more dividends are paid. Since most of the stock is owned by wealthy investors, they are the primary beneficiaries.

Moreover, if fewer tax dollars are collected on dividend income, the increase in deficit is transferred to all taxpayers. The result is an income transfer from all taxpayers to the wealthy.

If the double taxation is eliminated by making dividends deductible where paid and taxable where received, the beneficiaries are the companies. They are more competitive with the cost reductions ultimately reflected in reduced prices. The indirect effect is that many more people benefit. In the literature, this approach to elimination of double taxation is called the dividend deduction method.

Another effect is that debt and equity financing are placed on the same tax status eliminating the bias for debt over equity in capitalizing a business: interest/dividends deductible where paid and income where received. "The immediate effect of the deduction is to equalize the tax treatment of dividend and interest payments. Thus, the burden of the corporate income tax will fall only on retained earnings." [1].

Testimony by the Cato Institute in 2003 before the Senate Democratic Policy Committee includes the conclusion, "A full corporate dividend deduction may be the most simple and straightforward method of creating neutrality between interest and dividends, and thus should be considered by Congress as an alternative to the Bush approach." [2].

What is really distressing is that the Republicans, who control the House, haven't passed a tax reform bill incorporating the limited Constitutional government principles. Yet, the House Republican plan states the objective:

"America’s tax code has grown too complicated and cumbersome. We need a tax code that is flatter, fairer, and simpler to ensure that everyone pays their fair share, lessen the burden on families, generate economic expansion, and create jobs by making America more competitive."

This general objective should have bipartisan support; however, the dividing issue is likely the definition and meaning of "fairness". Leadership requires that the Republicans define what they mean by "fairer" and "everyone pays their fair share".

Where is the House bill? It sure looks like President Obama has stolen or will steal the tax reform issue. The Republicans will be PARTY OF NO again. Please write to your member of Congress.

Important Posts

Endnotes

[1] David B. Clement, "The American Law Institute Reporter's Study of Corporate Tax Integration: A Critique", Georgetown University Law Center, 1994 Feb 14, http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA277851 (accessed 2012 Mar 21).

[2] Chris Edwards, "Dividend Taxation: Nearly All Major Nations Relieve Double Taxation", Cato Institute, 2003 Jan 21, http://www.cato.org/testimony/ct-ce0301.pdf (accessed 2012 Apr 10).

History: Changes are usually identified in the text with the date which facilitates searching by date. Edits are usually noted by add and ~~delete~~ changes.

2012 Feb 22 — Initial Post

Links: Double Taxation on Dividends at [http://curntbk.blogspot.com/2012/02/double-taxation-on-dividends.html]

A Curmudgeon's Notebook

February 22, 2012

Double Taxation on Dividends

No comments:

Post a Comment