Dividends

Daniel Davies dsquared at al-islam.com
Tue Jan 7 11:47:04 PST 2003


Doug wrote, in re dividend tax reform:


>>What's so good about it?

Double taxation of dividends is a subsidy to gearing. Gearing causes financial fragility, which increases the volatility of output, the burden of which volatility falls disproportionately upon the poor. You've got a bit in "Wall Street" about the gearing-up of the US corporate sector through share buybacks during the 1990s; this is in large part due to the unfavourable tax treatment of dividends.


>Is the American corporate sector suffering
>under years of ruinous taxation? Are the American rich >suffering
>under years of ruinous taxation? Fuck 'em. They've gotten >a free pass
>for, well practically forever.

There are three issues here:

1) The general level of taxation 2) The degree of progressivity of the tax system 3) The distortions caused by the tax code.

The current Bush proposal is arguably wrong in terms of 1), seemingly certainly bad in terms of 2), but potentially good in terms of 3). There is a quote from Yes Minister which seems apropos; it is a principle of the British Civil Service to advise "If You Must Do This Bloody Silly Thing, Minister, Please Don't Do It In This Bloody Silly Way". If one took it as given that the objective of giving a big present to the rich had to be met, then at least doing it in this way helps to cure a quite important distortion. It's better than a cut in the top rate of income tax with similar fiscal impact.

I don't know enough about the US tax code to answer your question about state and federal income tax, but unless there is some wrinkle I'm unaware of, it remains the case that however many times your income gets taxed, it would be taxed one more time at the corporate level if it was dividends.

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