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Thursday, May 10, 2012

Tax rate on dividends and job creation

Today's Politico (5/10/12) has an opinion letter to Treasury Secretary Geithner from 18 CEOs asking the Administration to not support increasing the tax rate on dividends ("CEOs: Don’t raise taxes on dividends").  Currently, qualified dividends are taxed at capital gains rates (15%) rather than as ordinary income. This special treatment expires at the end of the year as do the lower regular and capital gains rates. So starting January 2013, the top tax rate possible on qualified dividends is 39.6% (plus an extra 3.8% new Medicare tax that starts in 2013 for upper income individuals).

I find this statement in the CEO letter confusing: "The administration’s plan to increase the top tax rate on dividends from 15 percent to 39.6 percent in 2013 will very likely have a seriously disruptive effect on this economic sector, reducing the incentive to pay dividends."

So, corporations won't have an "incentive" to pay dividends if the shareholders are in a 39.6% tax bracket?  Don't corporations pay dividends because they have earnings to share with shareholders?  What about the shareholders who are not in the 39.6% bracket (that top rate applies to less than 2% of individuals)?  What about corporate shareholders who also get a dividends received deduction?

The CEOs also say the higher tax rate will hurt seniors many of whom depend on investment income to make ends meet. Wow!  That is only a small percentage of senior who likely even get an appreciable amount of dividend income and if it is a lot of dividend income, they must have large portfolios?  Why should they get a lower rate on that income?  If any seniors are relying on their dividend income to make ends meet, they are not in a 39.6% bracket, and perhaps might even be in a 15% bracket.  And if they are really struggling to make ends meet, they probably don't even have an investment portfolio.  Wow!

And the letter notes that the lower rate is also important for competition and job creation!  Shareholders use dividend income to create jobs!?  

It is troubling to see this letter as it makes odd statements that distract from what is really needed to improve the tax law.  Why don't they be bold and talk about corporate integration - taxing corporate income once and creating a system that will allow for that.

What do you think?


Cole said...

I absolutely love your perspective on this. It really cuts right into the heart of the issue and lays it all out straight.

Randy Eickhoff, CPA said...

Professor Nellen:

The other broader impact of the reduced dividend rate is the impact it has on export sales through an IC DISC. There are literally thousands of small privately held businesses that export goods and services that utilize the IC DISC to reduce their federal tax burden and keep them competitive in a global economy. Increasing the dividend rate back to ordinary income rates would severly limit their ability to compete internationally.

Correct me if I am wrong here but dont most developed countries have a lower dividend rate than ordinary income rate?