A small addendum to my discussion of the dividend tax. It is important to point out that, although you currently pay income tax on dividends as if they were regular income, you do not pay payroll tax. That's a sharply lower effective tax rate already.
Posted by Greg at January 7, 2003 10:04 AM
Taxing dividends is double taxation. The corporation pays tax on its profits. Those profits are distributed to the owners. No goods or services are provided; there is only a transfer of money. If taxing dividends is legitimate, then taxing birthday money is also legitimate. Both are simply transfers of funds.
I am definitely middle class. Ending dividend taxation would benefit me considerably and I would put that money into the economy.
Hey, my Dad reads my blog!
Yup. Note that gifts of cash are taxable as income above a few grand. So are gambling winnings.
Of the events generally categorizable as "money changes hands", the government decides that some set is taxable. There is at best limited consistency in this set, members of which support various theories of taxation. I consider the theory of taxation which characterizes some members as "double taxation" particularly egregrious, because most series of "money changes hands" events are subject to taxation at most stages. I.e., most taxation is n-fold, not just double.
Corporate dividends are not a special case of "money changes hands" events, subject to unjustly-high levels of taxation. In fact, they're rather less subject to taxation than other such events. Corporate taxes on profits are horribly inconsistent and riddled with exceptions and loopholes. E.g. Enron's Corporate Income Tax: For 1996-2000, Enron made $1.8B profits. It paid federal income taxes only in 1997, and netted $381M in income tax rebates over the 5-year period.
After corporate profits escape the negligible bite of tax (the first prong of "double taxation"), they're distributed to shareholders. If your shares are held in a tax shelter like a 401(k), their dividends are not taxed at all; even if they are treated as ordinary income, they're subject only to ordinary income tax and not to payroll tax, as I noted. On the whole, dividends are taxed considerably less at both stages than the same dollars in salary, which have the distinction of having been earned and not just possessed (a virtue we Americans usually honor in our myths).
In salary, yes, you're middle class, but you're sixty years old and have been accumulating retirement assets for many years. That puts you in a different category more akin to the population of Palm Beach than a family of four.
What I'm probably more angry about is the misrepresentation of the tax cut. It's painted as good for that family of four by virtue of an increase in the child tax credit and the overhaul of the so-called "marriage tax penalty", but more than half of it comes from the dividend tax elimination, which does not benefit the family of four at all. The benefit of the dividend tax elimination is heavily weighted toward affluent Americans.