A Tax Lesson from the U.K. that the U.S. is Ignoring

If we are to be more like Europe, as some have argued, then perhaps we should learn from their mistakes when a highly progressive and unfair tax system is imposed on the “rich.” Evidently, a new 50 percent tax rate on the rich is not bringing in the

anticipated revenue that the British Treasury expected. [read The Telegraph article here.] Speculation is that since individuals and businesses knew it was coming, they extracted dividends in advance, sold assets or relocated. The article notes:

“Confederation of British Industry, in

its Budget submission today, urges ministers not introduce new levies on the rich, warning that the UK “will become a less attractive location for entrepreneurs and key employees””.

This comes as no surprise, yet there will always be policymakers who believe that hurling bad tax policy at those who are perceived to be rich will produce enough revenue to feed the social programs of the rest. It never works for long.

Meanwhile, not to be outdone by bad British tax policy, the Obama administration is proposing its own prosperity-killing ideas: included in the 2013 budget is a proposal to hike dividends taxes [read WSJ article .] Of course, as always with thie administration”s tax proposals, it will ostensibly only affect the rich (defined as singles earning $200,000 a year and couples earning $250,000 a year), but this is the typical myopic view of investment taxes. History shows that the tax rate on dividends is a factor in whether firms choose to pay dividends. If the dividends rate exceeds the capital gains rate, as would be the case, firms would choose to hold on to cash rather than pay dividends. This does not only affect the rich – it affects anybody who has any money in any account that is invested in a dividend-paying asset. So who does this affect? Most of the American citizenry.

Two years ago, I analyzed the effect of the expired Bush tax cut on dividends and the new Medicare tax on unearned income on stock returns. [See “New Taxes on the Wealthy are Bad News for Everyone.”] Of course, the Bush tax cuts were extended so that qualified dividends were taxed at the same rate as capital gains. But with the new threat of higher dividend taxes in 2013, it is worth trotting this piece out again. It remains to be seen whether the president”s budget will pass Congress, but if it does, Britain”s failed experiement will be in vain.



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  1. Joe Barnett says:

    You are so right! If dividends are taxed at higher rates, companies will reduce or stop distributing them. (The Obama administration should check into the undistributed corporate profits tax in the 1930s, meant to capture the profits of corporations that didn’t distribute them as dividends — taxed a high rates, of course. But that didn’t raise the expected revenue either.)

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