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Pepperdine University School of Law

Friday, February 10, 2012

Dividend and Capital Gain Taxes: A Comparative View

Ernst & Young, Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to Other Developed Nations:

Without action by Congress, the tax rates on dividends and capital gains are set to increase significantly on January 1, 2013. Even with the expiring tax rate reductions enacted in 2003, the United States currently imposes among the highest integrated tax rates on dividends and capital gains on corporate profits among developed nations. This study compares the tax rates on dividends and capital gains in the United States to those imposed by other developed countries and discusses the policy concerns that have caused other countries to impose lower tax rates on capital gains and dividends. ...

Taking into account both the corporate and investor level taxes on corporate profits and state level taxes, the United States has among the highest integrated tax rates among developed countries and these integrated tax rates will rise sharply in 2013: The current top US integrated dividend tax rate of 50.8% will rise to 68.6% in 2013, significantly higher than in all other OECD and BRIC countries. The current top US integrated capital gains tax rate of 50.8% will rise to 56.7% in 2013, the second highest among OECD and BRIC countries.

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I really wish they would include imputed corporate tax rates in this kind of analysis as well. Seems incomplete without them -- though it is hard to impute with much precision.

Posted by: TallDave | Feb 11, 2012 6:52:14 AM

Or is that what they meant by "corporate and investor level taxes on corporate profits"? Mea culpa? But it doesn't really look high enough to include both dividends and corporate taxes on top of capital gains. Perhaps I am missing something.

Posted by: TallDave | Feb 11, 2012 6:54:54 AM

I think the study fails to adjust for the greater number of income exclusions and tax incentives in the United States. We may have steeper rates but the taxable base for US companies much lower. Moreover, we allow the use of more favorable taxable entities - LLCs, S corps - not allowed in other countries.

Posted by: John | Feb 13, 2012 12:02:44 PM

This is misleading for Australia, as we have an imputation system that prevents the double taxation of dividends.

At the moment, our company tax rate is 30% (reducing slightly soon). When a dividend is paid to the shareholder they gross up the amount received and get a "franking credit" for the company tax paid.

For example - the company has a taxable profit of $100, and pays $30 in tax.
It then pays the $70 dividend to the shareholder.

The shareholder declares the $70 dividend, plus the $30 franking credit as income = $100

If the shareholder is on a marginal tax rate of 30% (which applies here for incomes between $37K to $80K the tax on the $100 grossed up dividend is $30, less the $30 franking credit. Result is zero extra tax.

If their income is below $37K, they are on a lower marginal tax rate and this results in a tax refund.

Using my earlier example, if the shareholder's income (including the grossed up dividend) was below $16K they would get back the full $30 tax the company had paid as a refund. So you could argue that in this case the company's effective rate of tax was zero.

Someone earning over $180K is on our top marginal tax rate of 46.5%.
In this case the tax on the grossed up dividend would be $46.50 less the $30 franking credit, so they would still owe $16.50

Only in this case is the effective company tax rate 46.5% as the graph shows.

In conclusion, only the top five or ten percent (my guess) of our taxpaying population would pay the top rate - for the vast majority the company tax rate would be 30% or less.

Posted by: RP Dunk | Feb 13, 2012 6:43:36 PM

No other system has produced as much wealth in as short of time or distributed as much wealth to as many people as capitalism. That wealth creation and distribution allowed the largest number of people to have the highest quality of life ever seen in history. The U.S. government was setup to foster and protect this most valuable jewel, capitalism. I am very thankful for that. Those greedy companies produce bountiful food, clothing, shelter, transportation and luxuries.

Capitalism is much better than the government control systems of the past that produced so much suffering – ‘the killing fields’ of communist Vietnam, the massacre of Mao’s revolution (that is now being remedied by capitalism), the economic collapse of the Soviet Union (where people would fight over what few goods were available), the deeds of Stalin, Hitler, Mussolini, the Egyptian forced labor (that produced great wealth only for the Pharaohs), or the starvation of hunter gatherers during a bad year with the constant tribal warfare, Polynesian pole-people, shrunken heads, cannibalism, slavery and uncured diseases.

It is unfortunate that in the midst of such wealth as we have in the USA that there are spoiled babies who spend their free time bashing the system that feeds them. Any idiot can destroy. It is much better to create. Some people want ‘something for nothing’ and try to reward those who think the same way. But ‘something for nothing’ creates nothing and leaves people fighting over what little is left. Other people want to contribute for what they receive and create wealth in the process. When you take their wealth, you also take their incentive to create more wealth.

Government has no right to allow or not allow me to keep what I have earned. Government only has the right to protect my right to make that decision. Giving government power beyond this limit is a step back to the oppressive systems of the past. It is unfortunate that the USA has crept more toward the oppressive direction over time.

Forced Labor (Slavery) is not efficient and slaves will flee when they can. Tyrannizing companies only encourages them to leave resulting in more unemployment and loss of wealth production.

Force doesn’t work. (Whips)
The foundation of government is coercion and theft.
“Something for nothing” produces nothing and leaves people fighting for what is left.

Freedom works. (Carrots)
The foundation of capitalism is incentive and trade.
“Something for something” produces something resulting in greater wealth.

Let people become rich and retire so that others can work in their place to create wealth and also retire. Stop taxing people so that they cannot become rich and retire and cannot let others take their place. The retired rich require no tax money and instead use honestly earned savings to employ others to provide their needs.

Mr. Ed
Equestrian Support Specailist

Posted by: Ed | Mar 3, 2012 11:22:17 AM