By Pam Villarreal
Filed under Tax Issues
on October 5, 2010 with 2 comments
Before closing shop, Washington politicians promised they would get around to working out America’s tax situation when they returned from their campaigns. According to Donald Luskin of Trend Macrolytics LLC, the straits couldn’t be more dire: just yesterday The Wall Street Journal put forward his predictions (See “The Trade and Tax Doomsday Clocks,”) Luskin seems to think we’ll be ringing in the New Year with balloons, confetti and a great recession.
Without extensions, taxes on your investments will probably stick it to you — how much you suffer depends on your income. The dividend tax rate is set to leap from the flat 15 percent to the ordinary income tax rates. This means
that dividends could be taxed as high as 39.6 percent for the top earners. (For more on investment taxes see the NCPA publication, “New Taxes on the Wealthy are Bad News for Everyone“).
fareast-language: EN-US; mso-bidi-language: AR-SA;”>But even before the dividend tax hits the individual investor, the taxation starts with the company paying the dividend. If company profits are not reinvested and are instead paid out to shareholders, they are first taxed at the corporate tax rate. If the company's corporate marginal tax rate reaches 35 percent (the 2nd highest corporate tax rate in the developed world, by the way), then $1.00 in dividends is, in reality, just 65 cents. Suppose that 65 cents is then paid to a shareholder who is in the 39.6 percent tax bracket (which will be likely since Congress has twiddled their thumbs on extending the Bush tax cuts). That 65 cents then becomes about 39 cents. The bottom line? One dollar of dividends has been taxed down to a mere 39 cents, bringing the total marginal tax rate to a whopping 61 percent.
It is unclear to me why members of Congress advocate the rights of shareholders and rail against Wall Street and big corporations, yet they shoot themselves in the foot by taxing firms in a way that creates an incentive for them to not reward shareholders. When dividends are paid they are taxed to death so the “average shareholder” receives next to nothing. Surely I am missing something here.