Why not simply allow companies to expense dividends?

That would be the straightforward way of ending any
double taxation and insure that the dividends were taxed once. It would put dividends on the same level as interest income.

Josh Halpern

Hi Brad,
I think the issue of taxing dividends isn’t so much as tax stimulus but rather more a means of promoting a concept of fairness. First, my mother is 75 years old, to her owning a stock is owning a part of a company. As an owner she feels she should be entitled to a percentage of the profits equal to her ownership of the company.

Therefore, her stock assets tend to be in those companies which give the highest dividends. Why else buy into a company if one isn’t going to get a return for the investment? However, most of the current investors (speculators) in the stock market seem to think that owning a share of the company is equivalent to holding a betting slip from the neighborhood numbers runner. And that is the attitude of the Congress. Tax what gains stocks made, and tax what profits stock ownership paid in the form of dividend.

The intent is obviously to catch the investor both coming and going. We tax gains made in profitablility as well as the gains of speculation. the result is that one who invests in the stock market as a vehicle for ownership of a profitable company not only faces the same taxes we levy on speculators, but also on the ownership of the company.

Now that wouldn’t be wholly unreasonable, that is if we thought that taxes were reasonable at all, if we didn’t look at the fact that the profits out of which the dividends are paid are _already_ taxed! The better solution would be to distribute the earning to the investor prior to the taxation of them as corporate profits. Owners pay taxes on the income they receive, and Corporations only pay taxes on the undistributed profit. Just like what happens in the small company I partially own.

Ownership of stocks then becomes an analysis of the potential for earnings (how well a company does) rather than the insanity we currently face wherein “investors” in the stock market are actually “gamblers” whose returns are based on criteria that are often far different from the books a company keeps.

Jody

PS: Brad, we miss you on the Bar. There is a dearth of the rational left...not only on the Bar...but apparently everywhere.

The money paid in dividends is taxed twice because it is received by two different people. First the corporation and then the shareholders.

What? That shareholders are the same as the company? If so I need a list of the shareholders of WorldCom because they owe me the money I lent to the Corporation when I bought its bonds.

If the corporation and the shareholders are the same for the purpose of sharing profits, should they not also be the same for the purpose of paying debts?

Perhaps they are simply not the same at all.

As someone once said, "the purpose of a corporation is for a gentleman to decide which of his debts he intends to pay."

The money paid in dividends is taxed twice because it is received by two different people. First the corporation and then the shareholders.

What? That shareholders are the same as the company? If so I need a list of the shareholders of WorldCom because they owe me the money I lent to the Corporation when I bought its bonds.

If the corporation and the shareholders are the same for the purpose of taxing profits, should they not also be the same for the purpose of paying debts?

Perhaps they are simply not the same at all.

As someone once said, "the purpose of a corporation is for a gentleman to decide which of his debts he intends to pay."

The money paid in dividends is taxed because it is received by two different people. First the corporation and then the shareholders.

What? That shareholders are the same as the company? If so I need a list of the shareholders of WorldCom because they owe me the money I lent to the Corporation when I bought its bonds.

If the corporation and the shareholders are the same for the purpose of taxing profits, should they not also be the same for the purpose of paying debts?

Perhaps they are simply not the same at all.

As someone once said, "the purpose of a corporation is for a gentleman to decide which of his debts he intends to pay."

Every Writers Workshop I attend urges the aspiring writer to make a thing true in his story by saying it three times.

Have you, Dwight, perhaps attended similar workshops? ;)

Jody

An answer to Jody...

Taxes are inherently unfair. Everyone can make an argument for why her taxes (or in this case, her mother's) should be lowered. But one must look at the consequences of that act. Lowering your mother's taxes through ceasing to tax dividends will result in a deficit. That deficit will result in higher interest rates, and as Orszag and Gale have demonstrated, raised interest rates will cost people far more than the tax savings they receive.

Paul Krugman has argued that dividends are not double taxed, that at most they are "one and a quarter" taxed. The reason is that corporations, though a variety of dodges, rarely pay the full rate on their taxes, and half of dividends go to IRAs, where they are tax deferred (and hence very lightly taxed, if taxed at all).

So, here is the situation. Your mother may indeed be facing "unfair" taxation, i.e., taxation at a rate higher than other people of her income bracket. But there are relatively few taxpayers in her situation. To make her taxes fairer would require giving substantial benefits to people with high incomes, many of whom pay little in taxes thanks to clever accountants or outright cheating (I have seen an estimate that the wealthy simply don't declare $200B in income). And, as pointed out, the net effect is to pile interest costs onto everyone. Surely your mother does not want to burden others.

As Professor DeLong and others have pointed out, double taxation is everywhere, and there are many cases that are far less fair than dividends. Consider the plight of a poor person who lives in a state with personal property tax. First he pays income tax (at the state level, since the federal tax is progressive and does not burden the poor). Next, when he buys a pair of shoes, say, he pays sales tax. And finally, at the end of the year, he makes a catalog of personal possessions and (assuming he's honest and reports them) pays a tax on those shoes.

This suggests a natural framework for considering taxes, namely as a decline of utility. Taxes always represent a decline in utility. For a wealthy person, the loss of $1000 of income is an annoyance. For a middle class person, it may be the difference of whether a child goes to college. For a poor person, it is the difference of whether she is homeless or not, whether she can pay for her insulin or not, whether she can afford to have her infant son's ear infection treated before it turns into deafness.

And yet, the poor are indeed heavily taxed, and the benefits they receive wildly overestimated (for example, if one has no money, then one may be able to get treatment at the emergency room. The costs of that treatment are exorbitant. But getting treated by an inefficient method is not worth more than getting treated by an efficient method).

We need to have a sense of proportion. We need to have a sensitivity to the needs of others, and of our nation. We need to look at the costs of tax cutting rather than just the benefits. And when we do all of these, it is clear that the dividend tax cut should not be enacted.

Dwight's been had by Brad's comment system.

Yup.

Warren Buffett has been as share holder conscious as could be, but Berkshire Hathaway pays no dividends. A corporation can grow in value for shareholders by pay dividends, or bying back shares of stock, or investing revenue in ways that add to the income stream in future.

Shares in Berkshire Hathaway have risen wonderfully in value for 3 decades and shareholders have been able to take capital gains when necessary. There are different ways to benefit from stock ownership.

Also, ending the tax on dividends will not help the many shareholders who hold stock in retirement accounts. Again, because of the range of tax benefits for corporations, much corporate revenue avoids taxes or pays quite little.

"Mom" with 100,000 dollars in an S&P index fund would have made about 1,600 dollars in dividends last year. So, we are talking about needing large taxable stock accounts before dividends make much of a difference. A million dollars in taxable S&P stocks would have earned 16,000.

Perhaps, the trade off in lost tax revenue and little or no stimulus from the dividend tax break should make us think of other sorts of tax reductions. Of course if you have several million in taxable stocks, a tax cut would be nice.

http://www.dfw.com/mld/startelegram/news/columnists/molly_ivins/5065499.htm

Molly Ivins -

The entire system of taxation is regressive. The only way that the spinners of damn lies and statistics can get away with claiming that the rich pay more in taxes is because they count only the income tax, which is progressive. (That's why it's called the progressive income tax.) But sales taxes, excise taxes, import tariffs, payroll taxes and the whole burden of state taxes (which are notoriously regressive in states like Texas) give an entirely different picture.

The Consumer Expenditure Survey prepared by the Bureau of Labor Statistics, which I found in the Jan. 21 New York Times, shows that the burden from nearly all forms of taxation -- income, excise, sales, property and payroll -- is spread fairly evenly up and down the scale.

The poorest fifth, with an average income of $7,946, have a cumulative tax rate of 18 percent. (Those are the folks so memorably referred to by The Wall Street Journal's editorial writers as "lucky duckies.") The richest fifth, with an average income of $116,666, now pay 19 percent in cumulative taxes -- and that of course goes down under the Bush plan. The percentages for the three middle quintiles are 14, 16 and 17.

Doh, that hooey NYT chart, which the BLS confirms is misleading, is leaking out. Argh.

Let me tell you, going through Infantry School with the name “Jody” frankly sucked...
And then there was Airborne....sheesh!

There are _millions_ of folks out there like my mom. They get screwed on their returns and they can’t afford to speculate. Which is what the current market is all about....speculation.

Speculating on the market is what Buffet is all about. Period. Dot. End.

The most unfair tax of all is the tax we levy on the working poor. Not the income tax, but the payroll tax. We take from the poor what is looking to be more and more like a government certified Ponzi Scheme. New workers will be lucky if the promise we made to the current crop of old folks is available to them when it is their turn to collect.

I’d like to think that ending the double taxation of dividends will change the market. Bring it back to the way it used to be. Something needs to. The current methods of stock prognostication is little more than witchcraft mixed with a dab of social science. Which bids woe for those of us whose 401 is tied to the “growth” of the market. While I’m not sure that Bush’s privatization plan is correct, I’d like to give it a fair look.

Why? I like this President. I don’t agree with all he does, but I truly believe that what he does, he does because he really believes it to be true. There is something to said for a man that does what his heart tells him, and I don’t think we have seen this in quite some time

Warren Buffett represents the best of business development and investment. The best, happily for all those who have known these past decades. Suggest a thorough reading of Berkshire Hathaway reports these 30 years. Thanks, WB.

Sincere policy formation is a help, poor policy formation is a problem now and will be more of a problem as time compounds the budget problems we are fostering.

How many states have personal property taxes other than for licensed vehicles (or boats)? I have lived in three states as an adult, and the only personal property tax I ever paid a personal property tax was on autos.

Most states piggy back on the federal system. If someone has zero taxable income for the IRS, they typically have zero taxable income for the state. Many states do have modestly progressive income taxes (SC ranges from 2.5% to 7%, though the top is reached at about $11,000 taxable income).

State sales taxes do affect the poor more, since more of their income is spent on items subject to the sales tax. However, even there, some states reduce the cost to the poor by reducing or eliminating sales tax on food and/or medecine.

State taxes are somewhat more regressive than the federal system. However, I doubt that people with incomes of less than $7,000 pay 18% of their income in taxes, unless you include the employer portion of employment taxes.

Regarding double taxation of dividends-note also that many OECD countries (I have read 30 of 35countries, including Mexico and New Zealand) do not tax dividends or have some other way to offset the corporate level tax.

Please note I personally do not like the President's proposal. (I saw and did not like the proposal to eliminate double taxation of dividends suggested in 1992.) Both strike me as too Rube Goldbergish in complexity. But, hey, I am just a tax CPA -- I do not know anything about taxes. (Maybe I should support the President -- it will keep me is business for years to come!)

Imagine I had a job (ha!) working for a corporation. The corporation, a person under law, would pay taxes on its profits. Then it would pay me a salary. Then I would pay tax on my income. How is that not "double taxation" as well? Is it simply because I am not one of the owners of the corporation employing me?

1) One argument against the taxation of dividends is that it puts diversified investors in public ventures at a big disadvantage to non-diversified owners of a partnership (where salary and distribution of profits can be arranged to eliminate that second layer of taxation). Is that just? We may or may not agree with the details of the administration's plans but I can't believe most of the people here would agree with the present system if it were not already in place.

2) The real goal should be to equalize the tax status of debt interest payments, dividend payments and capital gains appreciation. Corporate finance decisions must be made tax neutral.

3) Ivins is wrong that the tax system is regressive. It looks to be neither regressive nor progressive.

*Mr.* Jody Dorset (I assume that was the point of claiming to have served in the Airborne) says "We take from the poor what is looking to be more and more like a government certified Ponzi Scheme."

Mr. Dorsett, before you label it a "Ponzi scheme", reflect that Social Security has been in existence longer than most of corporate America. The only threat to its existence arises because we have succeeded in lengthening the lifespan of our elders to an unimaginable degree. We could even deal with that challenge if we could achieve the levels of economic growth of the Clinton years. Yes, that's right. The Social Security "deficit" only exists if the economy fails to grow. Business Week, Mike McNamee, 1995 if I recall.

In fact, Social Security is mildly progessive. About three quarters of all senior citizens would not have a home or food without it. Indeed, at the dawn of the twentieth century, elder poverty was universal. To say that it robs the poor is terribly ignorant of history.

It's quite possible that "millions" of people are in the same situation as your mother, eager for a dividend cut. That would leave hundreds of millions who aren't.

Andy is incorrect in thinking that most state tax systems are progressive. The exact statistics are given by Citizens for Tax Justice at http://www.ctj.org/whop/whop_txt.pdf. The poorest pay 12% of their income in state and local taxes. The top quintile pays about 8.5%. The state system as a whole is very regressive.

Are taxes, as anne concluded from the erroneous NYT chart, flat? Is Jason right to be so dismissive? The answers depend on exactly what one means by a tax. If one includes Social Security as a tax, Social Security is profoundly regressive at the upper end. If one regards Social Security as insurance, then it is off the table in debate. Medicare is essentially a flat tax.

The actual figures have not been put together in a nice package that I know of. But the reality is that the poor pay a very heavy burden of taxes, and the very wealthy are too clever to pay much of any... and, indeed, simply evade through criminal means the payment of quite a lot of tax.

Therefore, I think that neither anne nor Jason should be so confident of their positions. Better to research the issue more deeply than reporters for the New York Times are capable of doing.

Thank you, Charles.

Social Security, the indexing of Social Security benefits to inflation, and Medicare have indeed revolutionized the lives of older Americans.

For a "Mom" to have even 16,000 dollars in dividend income, she would have to have a million dollar S&P account. My Mom gets about 25,000 dollars a year from Social Security and far more income from corporate bonds from Vanguard.

The dividend moaning "mom" needs to learn how to invest her "million."

Is Jason right to be so dismissive?

I am; on my webpage I have a quote from the BLS talking about how the NYT screwed it up.

State tax systems are regressive, and the entire incidence of taxes in the US may be, but that chart is complete hooey.