Economics, U.S. Economy

Double taxation of dividends: Going in the wrong direction

Image Credit: Shutterstock

Image Credit: Shutterstock

From an economic and financial perspective, one of the worst things about Washington’s “fiscal cliff” tax deal is that it increases the double taxation of corporate dividends.

Adding to the 35% that dividends are first taxed at the corporate level, the now 20% top personal tax rate on dividends, plus the “Obamacare” dividend surtax of 3.8%, gets a total federal tax of over 50% on dividends (35% + [23.8% x 65%]= 50.5%)—a ridiculous level. Congratulations to the White House and its political allies on creating this investment disincentive.

Increasing double taxation of dividends also increases the tax advantage of debt over equity. Interest on debt of course has zero tax at the corporate level, so at the new top individual ordinary income tax rate of 39.6%, interest has an 11% total tax advantage over dividends. This is exactly what we need—more encouragement for debt and leverage: Didn’t we just try that one?

The right answer would be to eliminate taxation of dividends at the corporate level and then tax them as ordinary income at the personal level. Then interest and dividends would be treated exactly the same, as they should be, and double taxation of dividends eliminated, as it should be. This could be easily accomplished by making cash dividends paid as a tax deduction for corporations. While taking away the onerous double taxation, this would also take away the political argument that the “rich” are paying a favored low tax rate on dividend income.

Maybe next time.

3 thoughts on “Double taxation of dividends: Going in the wrong direction

  1. “The right answer would be to eliminate taxation of dividends at the corporate level and then tax them as ordinary income at the personal level.”

    What a guy!!

    Why don’t you try running for office on that platform?

    LOL!!

    The AEI: the bottomless source of mirth!

  2. isn’t the tax levied on the INCREASE?

    if you applied this same logic to salary- you’d be saying that if a guy got a raise, he should not be taxed on the raise….right?

  3. Dividends are paid from company profits (if the company loses money, there aren’t any dividends to distribute). But the profits are taxed before the dividends are paid out to investors.

    If a citizen invests in a house, the citizen gets to deduct interest on his DEBT (mortgage loan). If a citizen invests in Microsoft, the citizen gets taxed on the PROFIT from his investment, even though as a shareholder in Microsoft he has already watched “his” company pay tax on corporate profits.

    This makes no logical sense, but of course it does win enough votes to get politicians re-elected.

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