Okay…In addition to what jeevmon said, don’t we need a a sense of history here? One reason why investors prefer stocks that grow share prices rather than earning dividends is that share price increases get taxed at a lower capital gains rate. Why? Because the same folks who are bringing you this tax cut on dividends told us that we needed a lower capital gains rate to encourage investment!!
So, what is the truth here? And, how long will it be before these same folks are saying we have to cut the capital gains tax rate to zero because now the differential between that rate and the lack of tax on dividends is creating distortions?!?
I say that we should call their bluff. If they really believe that taxes should be eliminated on dividends to correct a distortion, I say that by all means they ought to go ahead and do it. But, then let’s eliminate the “undesirable” side effect of throwing money at the wealthy by raising taxes on the wealthy to roughly make up for it. That would make it more revenue-neutral and not regressive!
This will help us to separate those who support this policy because they think it makes good economic sense from those who support it because they just love cutting taxes on the wealthy. [Well, okay, there is a third category who argues that cutting taxes on the wealthy is, coincidently, always the greatest thing you can do for the economy. If they want to make that questionable case, let them do so!]
Corporations are legal entities and it is unfair for one legal entity (corporations**) to be free from tax on its income, while others (you & I) are not. Additionally, corporations provide legal protections that partnerships & single-propietorships do not enjoy, such as limited liability. If you own GM stock and GM goes bankrupt, you only loose your stock, not your house, when it comes time to settle up for GM’s debts. I’ve assumed that the double taxation was to balance the benefits of limited liability.
Hey, grienspace, I haven’t been following the news. What’s the story here, Bush wants to drop taxes on dividend income? Completely, or just the rate?
**May I mention in passing how much it pisses me off that churches don’t have to pay taxes on their profits? Thanks for letting me get that off my chest.
I’m not with you for the equality of legal entities. Yours and my income primarily exists to provide gratification for ourselves and our loved ones. Corporate income exists to gratify others, namely shareholders, and indirectly employees and clients/customers.
Why don’t you start your own thread with your position re the unfairness of not taxing the tithes of believers?
This raises an interesting situation. The organization that pays my pension can invest capital without paying taxes on dividends, but when they make pension payments to me, this pension will be taxable income. The economic effect is to defer, but not eliminate, taxes on dividends
OTOH if I take a lump sum instead of a pension, I can invest the money myself. Under the Bush proposal, my dividends would be tax-free, not just tax-deferred. I just retired and must make this exact choice within the next few days. Not knowing whether Bush’s proposal will pass makes the decision that much more difficult.
My impression was that with interest rates as low as they are now, a lump sum payment was already looking pretty good. (That’s the way it goes, right…When interest rates are low, the lump sum payment is higher?) It sounds like the possibility of Bush’s plan passing (which it probably will…or some compromise version of it) only sweetens the deal.
On the other hand, if you plan to use your money to contribute to conservative causes, then go with the pension.
I’m just presenting the reasoning as I’ve heard it. I didn’t imply that I agree with it. Though for the sake of annoyance, let me note that you dropped half the argument and didn’t follow through on the other half. Why does a different raison d’etre for legal entities’ incomes imply different standards of responsibility regarding taxation? A corporation is a legal entity that uses the resources of the state, no? It engages in lobbying, politics, and legal wrangles largely independently of its owners, no? It exists to provide investment income to its owners (and hopefully jobs and goods & services to the public), but once constituted it also exists for its own sake. It doesn’t die with the owners. It has a life of its own–almost literally. No? Not rock solid reasons to tax corporate income, but certainly prima facie.
Because I was only making the remark in passing. Hence the, “May I mention in passing” introduction and the foot-noted format.
But LLP’s and LLC’s provide limited liability in the same manner as the corporate form. LP’s (not the same as LLP) provide limited liability for the limited partners. All three forms get pass-through tax treatment. Why should the corporate form be treated differently?
The light entertainment value of this is, as announced on the radio this morning… it’s not all stocks. Any company that didn’t pay taxes, thanks to a loss? You pay tax. Which may make mutual funds interesting.
I wasn’t aware that that was the case. But like I said, those are merely the arguments I’ve heard (in answer to a previous question). I haven’t heard any extensions to the arguments so I really can’t do them more justice. Sorry.
Discussion amongst a few people here: how will the passing of Bush’s proposal (tax-free dividends) impact participation in 401K/IRA plans.
I have a brokerage account and husband has a 401K. (Rather small ones, but hey it’s a savings.) I’m sure I’m missing something, but if the proposal passes it looks to me like we’re both going to be earning compound interest tax-free (on stocks) until disbursements. A friend says that the employer’s matching funds still outweighs the restrictions placed on accessing the money, making that still the better choice. (?)
Because of the tax-deferred status, 401K disbursements are taxed as income, not capital gains…will that change? Maybe not? I wish I could find more on the web about ‘what the plan means to you’ or something, but there isn’t much.
Tee: One of the problems with tax “proposals” is that the actual language of the changes being proposed has not yet been written. Additionally, while some of the big stuff will be amendments to the Tax Code itself, many of the details will ultimately be addressed in regulations which won’t get written for months. Even assuming Bush has Congress locked up and that it will accept his “proposal” 100% without dickering, it does not yet exist in the form of a Bill and we do not yet know precisely what we are talking about.
Nonetheless, taxable investment accounts will benefit because dividends will become tax-free. While 401(k)s already defer taxes on dividends currently (and presumably–but again we don’t know for sure because no specific language is yet available–would permanently avoid such taxes under the proposal), they also have another valuable advantage over ordinary brokerage accounts funded with after-tax dollars: 401(k)s are funded with pre-tax contiributions and we do not pay income taxes currently on these amounts which would otherwise be included in wage income.
