Help me out here. I just can’t fathom the justice of income earned by the sweat of the brow being taxed while income “earned” by sitting on one’s ass is immune from the demands of the federal treasury. Why are Americans not in an uproar? How does this possibly benefit the economy?
Lest anyone suspect that I’m a left-wing radical, nothing could be further from the truth. I could never understand the sense in taxing corporations for income prior to dividend disbursement. After all excess cash witheld prior to the issue of dividends could be used for more capital investment and job creation.
Instead Bush’s tax plan with respect to stock dividends will be an incentive to funnel cash to stockholdersas a tax shelter won’t it?
One already earned by the sweat of one’s brow the money that one invested before one sat on one’s ass.
As a small (very small, one employee — me) business owner, the majority of my income comes from stock distributions. Not all shareholders are independently wealthy speculators.
Lib, surely your own experience undermines the point you make? As the proprietor and sole employee of a trading company, the earnings of the company are generated by your labour and your investment, but probably more by your labour than by your investment. (That depends, obviously, on what the company does, but there are many companies where the earnigns are generated largely by the labour of the proprietor, and where capital invested is not significant.) You can choose to take out your income as salary, or as stock distribution. Why should the taxation of the income differ depending on the form in which you choose to extract it?
Well, it shouldn’t. But it does. None of it should be taxed, but as it stands, salary is whammied by the additional taxes of Social Security and Medicare.
This also penalizes high growth companies that reinvest their dividends in their business rather than giving that money to shareholders. At different parts of the business cycle. One way of looking at this is utilities will benefit but start up companies/high tech companies will be hurt. Heck, any capital intensive company will be hurt.
Once again the hand of politicians in the markets to try look good. Unintended consequences will certainly be felt.
But are you arguing for a further gap between tax rates for salary and dividends? Not only would salary be subject to the additional social security taxes you mention, but dividend income would avoid even income tax.
My suggestion is that whatever taxes have to be raised should be raised by uniform taxes. It is not the business of the state to say that this form of economic activity is more deserving or praisworthy than that form, and that it should therefore be encouraged or rewarded by concessional tax rates. In particular it is not the business of the state to say that investment is more praiseworthy than labour.
OTOH I would argue that inflation should be discounted because if I invest and get 4% in interest and inflation was 4% I would say I have, in fact, not made any real income. When I am getting a yield which is below the rate of inflation and then the government taxes my “income” they are taxing income which is non existant.
As a direct result of this plan, I, for one, will be buying stock. I’m sure many others will do the same, and those who already own stock will more than likely buy more. This should result, in the long run, in the stock market travelling in a more upward direction.
wouldn’t it be better economically to stop taxing corporate profits but continue to tax dividends? IE - eliminate the “double tax” by taking out the corporate tax. I would think that measure would be better for the economy - and lead to higher dividends as corporations would have more money left over without taxes - but also lead to more re-investment by corporations. This would generally help startups as well as established businesses and lead to higher stock prices (again taxed only when sold for a profit by indivuals).
This will change a lot of things - how businesses plan for the future - stockholders will want as much dividend as possible and perhaps lead to even more short-sightedness than we already have in business planning today.
We will see I guess as the congress will likely do whatever the President asks at least for the next 2 years or so.
This is problematic reasoning. Today’s stock prices reflect the present value of the expected stream of after tax dividends, right? So a cut in dividend taxes would be immediately capitalised into current prices and have no effect on the long term path of the market. It would just be a once-off “gift” to existing shareholders.
This - roughly speaking - is the position of those who subscribe to the “New View” of dividends in the economic literature on company tax. This view, stemming from the finance literature of the late 1960s and early 70s, is opposed to the traditional view of corporate taxation, which holds that - since only natural persons and not legal persons can bear tax burdens - the taxation of companies taxes the corporate form more heavily than other forms of capital and that dividends in particular are an overtaxed form of income.
According to the traditional view, company taxes distort economic decisions in that they:[ul][li]distort investment resources away from the corporate form and towards other forms of business structure, such as trusts and partnerships;[]distort sectoral investment and output in that areas of the economy where the corportaion is particularly convenient (manufactures, mining) are disadvantaged and areas where this is not so (eg real estate) are advantaged, to the detriment of the economy as a whole;[]distorts corporate finance, encouraging debt over equity; anddistorts payout policy, encouraging retention of earnings over payment of dividends, with likely repercussions for corporate governance.[/ul][/li]
In the traditional view, some form of taxation relief for dividends would improve the allocation of investment and be good, over time, for equity. This was the view of the Canadian Carter Royal Commision: that the corporate tax should be integrated with the income tax via a system of dividend imputation (ie relief) or the treatment of company income as if it were a partnership. In 1987, Australia adopted a system of dividend imputation (which, for reasons that don’t really concern the US, has not been terribly successful).
This is a fiendishly complicated area of tax policy. In my judgement (the guy in the next office is doing his PhD on this topic and I teach tax policy - so whilst I may be wrong, it’s bound to be for really sophisticated reasons) no-one really believes that the “New View” is the whole truth, but equally the traditional view is overstated (for reasons I can go into later if people are interested). The corporate tax is at least somewhat distorting and there is some case for dividend relief.
But this would only improve the allocation of investment. It would NOT be a sensible way of stimulating the economy (supposing such a thing were desired). The reason’s simple enough: if the aim is to stimulate investment, an effective stimulus would apply only to new investment. Dividend tax relief applies to all the existing investment as well. For an equal dollar increase in the fiscal deficit, you’d get more bang for your buck with an income or consumption tax cut, or a cut in tax for new investment (although this last one would be terribly hard to do). Or, of course, an increase in government spending. The main effect of this tax cut is as a bonus to existing (mainly wealthy) shareholders (Surprise!).
Well, a lot of the “middle income” people who own stock, and are therefore in a position to collect dividends, hold stock in the form of 401(k) plans, IRAs and other tax-deferred vehicles that automatically reinvest the dividends and don’t distribute them as income to the owners. Pensions, as they used to be understood and still are understood in the UK and Europe (defined benefit plans) basically don’t exist anymore in the U.S., having been supplanted by the tax-deferred defined contribution plans, where you can defer tax on earnings earmarked for retirement, but the amount of those earnings is dependent on your investment choices.
I believe (not positive) that this tax cut applies to 401(k) plans, which is why it basically only benefits those who need it the least, i.e., rich people.
It will also unlock a lot of capital. There is going to be increased pressure for companies to offer dividends, which means investors will be rewarded when companies actually make profits. More companies will pay out dividends rather than holding huge cash balances, like Microsoft does.
This should also cause investors to buy stocks in healthier companies that pay dividends, rather than over-relying on growth stocks to pump up share prices. The amount of rampant speculation in the dot-com boom wouldn’t have been as great if there had been more emphasis on dividends and less on stock prices. So it should make the market somewhat healthier.
With all due respect, if you have created enough assets for yourself that you can generate substantial dividends as income, many reading your statement would suspect otherwise.
IAN American, but isn’t it already the case that dividends received by a US pension plan (in fact, all income received by a US pension plan) is exempt from US tax.
This is certainly a better alternative from a theory point of view, but is probably politically unworkable – if you think the outcry over cutting dividend recipient’s taxes is huge, imagine what it would be for a tax cut directed at impersonal business entities.
Tax policy should be neutral as to business form. There is no reason why electing a limited liability partnership (LLP) or limited liability company (LLC) form should yield only taxation at the individual level while election of the corporate form should yield double taxation. I have yet to hear a decent argument against this proposition.
Many small businesses elect the corporate form for limited liability and other reasons. While they can pay themselves a salary (thus avoiding taxation at the entity level), there are limits how much they can allocate that way, so they have to dividend out at least some of their profits. Lib may indeed make much of his money from dividends, but since he is running his own small business that money is still coming from the “sweat of his brow” and probably isn’t enough to qualify him as “rich.”