abolish federal tax on stock dividends????????

Great Debates
21

Maybe, maybe not. It may punish companies that decide to reinvest profits in research or capital improvements which may add more long-term to a company’s bottom line and may add more to the general economic welfare than an annual cash payment. Arguably, those company’s investment decisions are already reflected in their stock prices, but it could force a trade-off between capital investments for the future and dividend payments in the present, driving the stock of companies that would benefit from capital investment lower.

A healthy company is not necessarily one that pays a high dividend and a company that pays a high dividend is not necessarily healthy.

22

Then they would not understand how business works. On preview, I see that Dewey does. I pay myself mostly with stock distributions because, unlike my salary income, they are not subject to Social Security or Medicare taxes.

23

Hawthorne

Thank’s for an excellent post - cuts through the grass-roots “either-or” view and lets us see taxation policy as a complex subject.

One objection, though. You say …

In 2001 and 2002, despite a vicious drought, the economy there was by far the strongest performer of the OECD block. The stock market managed to escape the worst of the dot.com mess and come through if not with flying colours at least as a stable and healthy base from which the country has grown. Australia is a good model for any modern mixed economy (and I’m no fan of Johnny Howard).

The basic objection IMO to dividend taxes is that it’s a double tax - penalising the shareholder twice over. The choice is therefore either

  1. do away with corporate taxes, which has enormous implications for management of, and investment in, companies large and small, as well as for government revenue, and the outcome of which would be impossible to predict, or
  2. to eliminate the double tax on dividends, which is somewhat skewed in favour of “the rich” but which has positive implications for the vast majority of society.
24

Thank you for the brief education on an area I am not familiar with. Us wage slaves hear “dividends” and the image that comes to mind is the little fellow on the Monopoly board.

25

OTOH most assets are subject to depreciation over time. Why should cash value be treated any differently.

Forget the fact that the benefit of tax free income will mostly accrue to “wealthier” people or my sweat of the brow comment. Why should the source of income of a citizen determine his tax liability. Why should the guy who cleans toilets for a living pay social security, medicare and income taxes while Lib (sorry Lib :slight_smile: ) can earn about the same income and escape the toilet cleaner’s obligation to the nation?

I’m sympathetic to the double taxation concern, but what is the downside to eliminating the corporate tax instead? It’s been alluded that there is a downside, but no argument for this view has been presented.

For those who argue that there would be pressure to raise stock prices by reinvestment, how does that translate to lowering unemployment? Assuming as I do that employment level is the most significant factor in the health of the economy. And if that is the case, what is the justification for focusing on a particular income source as the avenue for channeling future investment.

26

Grienspace wrote:

And what makes you think that I do not clean toilets for a living? It’s the case that I do not (except maybe metaphorically), but if I did, I would incorporate.

27

Or, in other words. You wish to be a free-rider who does not pay your fair share of the cost of goverment. nice deal if you can get it.

28

What a Neanderthal comprehension. I pay federal and state income taxes on both my salary and my dividends. I also pay Social Security and Medicare on my salary. Twice. I also had to pay to incorporate, and I have to pay an accountant to assist me in dealing with frivolous government requirements. And I have to pay for both federal and state unemployment insurance.

Free-ride, my red ass.

29

[hijack]
I’m actually curious, Lib – why did you not elect to form as, say, an LLC?
[/hijack]

30

**

Please.
Are there any real arguments out there as to why we should be paying a double tax on dividends? I admit, I was quite impressed by the Bush administration’s economic strategy (!) because as an economics major I can understand what he is trying to accomplish. However, this scares me. Can anyone give a good argument against it that doesn’t involve finger-pointing at the people who actually pay most of the tax (the rich), or flawed premises that prefer short term growth over long term?

31

401(k) accounts are not only for rich people, by a long shot. In my office, everyone who has worked for more than 1 year is eligible to contribute to one, all the way down to the receptionist (who probably makes mid-$20’s, unless that meets your definition of rich). I paid into the Federal equivalent of a 401(k) when I made less than $20k a year.

For most of us, it’s only over long periods of time that our 401(k) funds gain the potential to provide a significant source of income, but then, that’s their whole *raison d’etre. *

32

The last time I checked, in Canada, you need to make about $200,000 annually in order to take advantage of tax benefits from incorporation. I don’t think janitors make that much money in America.

Sorry to misunderstand you on your tax burden. Canadians generally regard America as a country of extremely low taxes

33

Ahh, the class warfare knives are coming out again. “Free rider,” indeed.

I take issue with a couple of points.

1.) I think the idea that companies which do not distribute dividends will be penalized is basically wrong. If you accept the efficient market premise that stock prices, in the long run, reflect the expected future value of capital growth and dividends, Companies which choose not to pay dividends will not be penalized. The tax law does not negatively affect their discounted future value in any way. Companies which may reasonably pay dividends in the future, on the other hand, will get a lift. They have greater intrinsic value–or an increased probability of realizing it, which should be reflected in stock prices.

2.) The idea that a dividend tax cut does not benefit pensioners is wrong. Yes, pension plans such as DB and 401(k), and Roth IRA plans do not pay taxes on dividends. But because the tax cut, again, reflects the discounted expected future value of all dividends, which will be given a sharp lift, the value of all stocks will be bid up to levels which reflect that, whether they are in a tax-deferred vehicle or not. Who benefits? Us working stiffs. The argument that this is a sop to the rich while the little guy benefits naught is false.

3.) Opponents are also ignoring the impact of the tax cut on senior citizens, who DO derive a substantial portion of their income from stock dividends, and who cannot usefully be considered “rich.”

Icarus: <<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.>>

This is the first time I’ve seen Democrats describe elderly people who live on fixed incomes as ‘rich.’ Which I think is pretty rich in and of itself.

Democrats should bear in mind seniors who invest part of their portfolios in stocks such as utilities and REITs seeking income–which is a heck of a lot of them.

( Republicans should use this as a wedge issue to get between Democrats and seniors).

Since shareholders already pay taxes at the corporate level before profits are distributed in dividends, whether they decide to issue dividends or not, the argument that dividends somehow get preferential treatment to labor wages is just class warfare silliness. Once a cut is passed, the overall burden, expressed as a percentage of realized income, should be roughly the same for laborer and investor. Right now the investor winds up paying taxes twice on the same dollar.

I honestly wasn’t aware of the degree it would affect small business owners such as Libertarian. I think that’s another powerful argument in favor of the tax–it provides a very useful break to small businesses. And THAT is directly stimulative.

34

Ye gods.

Tejota, do you have the faintest clue how Social Security works? Being a “free-rider” is impossible - what you get out of Social Security is wholly dependent on what you put in. To take it to the extreme, if Lib decided to pay himself wholly in dividends and completely avoided paying Social Security tax, it means that he would not be eligible for a single penny in Social Security upon his retirement or disability.

Sua

35

Actually, Sua, I wish I could do that. But I am required to take a “substantial portion” of my income in salary. That means 15%, according to my accountant.

Dewey wrote:

It’s funny, you know. In retrospect, the question is hard to answer! :smiley: After several hours of discussion with people whom I trusted, including my accountant, I concluded that a Subchapter-S Corp was the way I needed to go. There were many factors, and there were advantages and disadvantages any way that I went.

36

—And what makes you think that I do not clean toilets for a living? It’s the case that I do not (except maybe metaphorically), but if I did, I would incorporate.—

Everyone with clean toilets has someone that cleans toilets for them for a living, even if it’s themselves.

If you pay someone to clean your toilet, however, their income is taxed. If you do it yourself, you can avoid paying the tax. Now THAT’S crazy: a government incentive to clean toilets yourself instead of hiring someone who’s probably better at it than you are.

37

Why do you see the stock market as an entity that sits in some sort of imprenetrable fortress, there only to make (or lose) money for investors. The purpose of the stock market is to enable companies to raise capital. The higher their stock prices (especially in relation to assets and earnings), the more efficient the capital raising. The more efficient the capital, the more the company can afford to invest, expand, hire etc. Thererfore, higher prices = lower unemployment! Q.E.D.

38

S corps are treated in exactly the same way as llcs/lps under the US Tax Code. The devil may be in the details for you, Lib. The actual language of the amendment will probably eliminate the taxation of dividends only where there has been corporate level tax (as is the case for market investors who own public company shares) since the rationale for elimination is that they represent monies already taxed at the corporate level. S corps (and llcs and partnerships) avoid double-taxation by avoiding corporate level taxes, so it is extremely unlikely that S corp dividend taxes will be eliminated. (I think it sounded to Dewey like you owned C corp stock–which does have a corporate level tax.)

The problem with discussing whether any proposed tax change is rational is that the entire Code is irrational. Unless we’re talking about a total overhaul, we’re discussing self-interest and fairness at every point–eliminating the dividend tax may be rational, but unless we’re making the entire code rational, this isn’t a particularly compelling argument, IMHO.

39

This was indeed my assumption. I think about S Corps the same way Chris Rock thinks about girls who don’t give head: “what, they still make you?”

And I agree that dividend tax reform should be limited to entities that are subject to double taxation. Lib, if you’re already getting pass-through treatment at the entity level on your dividends, then those dividends should be taxed on the individual level.

Of course, the rational way to do that (as several posters have noted) would be to just eliminate federal corporate income taxes on the income of C Corps, and leave divdends to be taxed as individual income. But politics obviously ain’t going to let that happen.

40

Asset depreciation is a deductible business expense, so you agree with me: Cash depreciation should be a deductible expense.