Dividend tax
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A dividend tax is an income tax on money paid to the stockholders of a company through dividend payments.
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[edit] Controversy
In the United States and many other jurisdictions, dividend payments are considered ordinary income and are taxed as such, the same as if the taxpayer had earned the income working at a job. Depending on the jurisdiction, interest income, collected rents, or other "unearned income" may also be taxed. It is the subject of recurring debate as to whether or not these taxes should be eliminated.
[edit] Arguments for abolition
Abolitionists argue that a dividend tax amounts to unfair "double taxation", in the sense that the company has already paid a corporation tax on these profits.[1] Some even argue for the elimination of all taxes on investment income including interest income and capital gains.
[edit] Arguments to keep the dividend tax
Some who want to keep the dividend tax as-is claim it is unfair to tax income generated through active work at a higher rate than income generated through less active means or that companies may not have paid their full share of income tax.
Their argument is that such a taxation can help the wealthiest of individuals who can afford to buy large quantities of stock as they could feasibly live off the dividend payments without any income tax on their earnings.
Another aspect that is argued is that the taxation is not unique in being "double taxed" as there are many instances where the same cash flow is being taxed and to focus on this with such scrutiny while characterizing it as unique marginalizes other points of taxation.
Additionally, there is also the argument that dividend tax is completely voluntary and, as such, is worth exactly what is paid. A business can chose to form under various forms that are not separately taxed (e.g., S corporation, limited liability company, sole proprietorship and partnership). However, these flow-through entities do not offer investors the same liability protection, freedom to transfer shares, and ability to create different classes of equity. Accordingly, it is argued that an entity has no intrinsic right to those benefits and dividend tax is merely the cost to access those benefits.
[edit] Double Taxation terminology
The term "double taxation" is sometimes used (unconventionally[1]), mainly in the USA, by advocates of the removal of dividend income tax for investors.
Due to the debate over the dividend tax, US usage of the term "double taxation", in recent years, has focused on the dividend tax (though not exclusively). In fact, the same cash stream is often taxed any time it exchanges hands in many other instances. The consumer or retailer pay sales taxes when the goods are purchased and then the business has to pay income on it before the dividends are paid out or the company uses the same cash income to reinvest which is also taxed. The word "double" also directly implies redundance.
[edit] United States
In 2003, President George W. Bush proposed to eliminate the U.S. dividend tax saying that "double taxation is bad for our economy...[and] wrong...[and] falls especially hard on retired people". He also argued that while "it's fair to tax a company's profits, it's not fair to double-tax by taxing the shareholder on the same profits."[2]
Soon after, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which included some of the cuts Bush requested and which he signed into law on May 28, 2003. Under the new law, dividends are taxed at a 15 percent rate for most individual taxpayers. Dividends received by low income individuals are taxed at a five percent rate until December 31, 2007 and become fully untaxed in 2008. These provisions are set to expire on January 1, 2011.
[edit] Canada
In Canada, there is taxation of dividends, but tax policy attempts to compensate for this through the Dividend Tax Credit or DTC for personal income in dividends from Canadian corporations. An increase to the DTC was announced in the fall of 2005 by Liberal finance minister Ralph Goodale just prior to the fall of the Liberal minority government, in conjunction with the announcement that Canadian income trusts would not become subject to dividend taxation as had been feared. Effective tax rates on dividends will now range from as low as 3% to over 30% depending on income level and different provincial tax rates and credits.
[edit] Other countries
In Finland, the dividend taxation will be in use as of 2005. Income tax is 29% for a stockowner and the total tax will be around 50%.
In the Netherlands there is a tax of 1.2 % per year on the value of the share, regardless of the dividend, as part of the flat tax on savings and investments.
In Romania there is a tax of 5% on dividends.
In the UK, companies pay corporation tax on their profits and the remainder (after any investment retention) is paid to share holders as dividends. Basic rate tax payers have no further tax to pay as the dividend is deemed to have been received net of 10% tax. For higher-rate taxpayers, additional tax must be paid at 25% of the net dividend received (32.5% less the 10% deemed tax deduction).
In Australia dividends are taxed at the recipient's marginal tax rate (up to 46.5% from 1 July 2006). Australia has a Dividend Imputation system which allows franking credits to be attached to dividends. This allows recipients of franked dividends to impute (or credit) the corporate tax paid by the paying company. A recipient of a fully franked dividend on the top marginal tax rate will effectively pay only about 23% tax on the cash amount of the dividend.
[edit] See also
- Passive income
- Estate tax (United States)
- State income tax
- Double taxation
- Taxation in the United States
[edit] References
- ^ Taxation authorities world-wide use the term double taxation to mean that taxation is levied by two or more different jurisdictions on the same gain. This is clearly unfair and is usually mitigated by tax treaty
