President Bush's budget team is steadily leaking details of his upcoming economics stimulus package. The detail that's been leaked most thoroughly is entirely removing the tax on dividends.
Sorry about the fast paragraph break, there. I simply can't read or type that phrase without stopping to pause. That approach to economic policy is alien to me. Setting aside the question of balancing the budget, I'll concede that a good economic stimulus package is probably a good tradeoff for taking on some debt. But eliminating the tax on dividends at a cost of some $500B in the next ten years? That's defiantly regressive. President Bush's tax policy is an echo of his father's, and its single subject seems to be "tax cuts for the well-to-do".
Eliminating dividend taxation will pump up the stock market a few percent, which will make 401(k)'s look a little plumper again, but they won't stimulate the economy. Corporations won't have any extra money. The people who get significant dividend income already have more money than they need to spend. The middle class and the working poor will get nothing.
One justification supporters of this type of tax cut always trot out is "corporate dividends are taxed twice -- once at the corporate level as profits and a second time as dividend income to shareholders. " (Houston Chronicle -- Bush Wants to End Dividend Tax). Calling anything double taxation is nothing more than a rhetorical trick trying to appeal to ignorance. Most kinds of taxation--income, excise, sales, capital gains, estate--work on transfers of money. For most kinds of exchange, the government takes a piece every time money changes hands. Dividends are taxed the same way--they are taxed as money is transferred to the corporation (if they are taxed at all), and then again when they are transferred to the stockholders. I'm inclined to treat them the same as any other kind of personal income. I know that I treat my quarterly dividend checks the same way I treat my paychecks. I can't tell the difference between a dividend dollar and a salary dollar.
Taxation is about paying for the government. I am in favor of strongly progressive taxation. Tax the rich. After all, to quote Willie Sutton, "that's where the money is." President Bush's plan will benefit a small fraction of our population who aren't doing too badly. This does not promote the general welfare.
Posted by Greg at January 6, 2003 9:40 AM
If he wants to eliminate double taxation, I want my sales and gasoline taxes back! I already paid taxes on the dollars I'm spending. -- DR
I think it was actually Willie Sutton who said that, in response to being asked why he robbed banks.
Corrected. Thanks, Pete.
Although it does appear that there is a transfer of money when a dividend is paid out, there really isn't.
As a stockholder you ARE the corporation; corporate taxes come out of your pocket.
There are several areas where double taxation is not employed: for example if you worked in Canada for a year all income taxes paid to Canada would be deductable from your IRS tax due.
I have always been a little perplexed by the US treatment of dividends; in the country I live in (and most other nations) they are not taxable for this very reason.
However, where the dividend comes from a foreign corporation (ie one who pays no taxes on corporate earnings to the US) then dividends should be taxable on the recipient as there has been no offsetting tax revenue paid in the US from the corporation (ie it hasn't been "paid once").
The reader who mentioned sales tax is absolutely right; sales taxes are generally double taxation. So, it is fair to argue against elimination of the divident tax by pointing out that the principle that there should be no double taxation is violated often by government.
Gordo:
As a stockholder, I am NOT the corporation. The corporation exists precisely to be separate from the stockholders--I'm not liable for the company's lawsuits or debts. I'm also not allowed to go in and rifle the company's supply closet, take the company car, or withdraw money from the company's bank accounts.
As I noted in the comments for this entry, most taxation, at least in the U.S., is n-fold; most money is taxed at most exchanges. Singling out dividends and characterizing them as "double taxation" is disingenuous at best.
I'll also argue that taxing earned income at a higher rate than unearned income (dividends, capital gains) is something of a disincentive to productive activity.