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Taxation of Dividends

By JLP | November 11, 2009

BG left the following comment on one of my previous posts:

“JLP won’t like me saying it, but even the ultra-rich play this game where their “income” (dividends & investments make up the majority of their income) is only taxed at 15%, whereas I’m in the 25% bracket. That is their gain, my loss.”

The reasoning for this is simple: dividends are taxed at the corporate level and again at the individual level. That’s why they are taxed at a lower percentage at the recipient level. If the “ultra rich” are getting all of their income from dividends and investments, that tells me that they probably already paid their fair share into the system in the first place.

This is one of the reasons why I like the flat tax. Charge everyone the same percentage on ALL INCOME regardless of what type of income it is. I would even concede a certain threshold (a first for me) in which individuals and families falling below a certain level do not pay taxes at all. The threshold would have to be low as I think EVERYONE should pay their fair share.

It’s not going to happen but I can dream…

Topics: Taxes | 30 Comments »


30 Responses to “Taxation of Dividends”

  1. BG Says:
    November 11th, 2009 at 3:40 pm

    I understand the responses for defending the low cap-gains tax, still doesn’t make it right, just like people who collect welfare argue for why they deserve their handouts.

    Income taxes must be progressive to remain fair, other than that, the only fair flat-tax is a flat-tax on networth (which in the end is nearly equivalent to progressive income tax) — but we’ve had this argument before. I challenge any “rich” person reading this that I pay a larger percentage of my net-worth in taxes than you do.

    In the mean-time, as part of the middle class, I am going to start putting effort into collecting whatever handouts from the government that I can. I’m tired of arguing for ways to make things “fair”, when I know that nothing will change. The rich will never give up their low 15% “income” tax (and sweet SSA tax caps), the poor will never give up their welfare benefits.

    The only logical thing I can do, if I can’t change the system, is to join the system and grab whatever I can too.

  2. Dave Says:
    November 11th, 2009 at 4:34 pm

    There is a flaw in allowing any member of a society to receive services ($$$) without paying in. No legal adult should be free from contributing taxes.

    Taking my tax dollars to give them to someone who never pays in is one of my biggest complaints about the current system.

  3. John Says:
    November 11th, 2009 at 8:31 pm

    A flat tax is just another way for the wealthy to pay lower taxes. If the top rate is now 39.6% and a flat tax is 22%, who is getting a bigger break, the person paying 39.6% or the person paying 25%?And let’s not forget, the Social Security tax will probably stay the same with the caps. Why do you think Steve Forbes has been trying to get a flat tax for years? It is certainly not to help the middle class.

  4. Foobarista Says:
    November 12th, 2009 at 1:56 am

    This is why we should simply abolish corporate taxes and tax dividends as ordinary income. One other thing I don’t like about dividend taxation is that dividends that are ultimately extracted from 401Ks are taxed as ordinary income, not dividend income.

    And getting rid of the taxation of corporate income would encourage more businesses to have headquarters in the US. US corporate taxes are among the highest in the world, and – unlike anyone else – we try to tax international income, so there’s zero reason for a nontrivial corp to be headquartered in the US.

  5. TFB Says:
    November 12th, 2009 at 3:42 am

    Dividend income involves substantial risk. Getting a 3% dividend while the investment drops by 50% is not fun at all. If “the rich” go for the safer interest income, they either pay the top ordinary income tax rate or invest in munis and give up yield. The yield difference is an indirect tax.

  6. kenyantykoon Says:
    November 12th, 2009 at 3:44 am

    this is why i want to be in that exclusive super rich club Because no matter what we say or do, these people seem to be above the law and they can twist the law with impunity. I was reading somewhere that Warren Buffett said that he would donate a lot of money to charity it the billionaires admitted that they pay less taxes than their secretaries. So i learn as much about finance and good money management so that i can multiply the resources at my disposal in the hope that i will be a billionaire in the years to come

  7. Foobarista Says:
    November 12th, 2009 at 2:25 pm

    The super-rich – and not so super-rich if you can handle it – are always “above the law” since they can move their assets around easily. If the US taxes them to the moon, their assets will simply move elsewhere. If you are not so super-rich but make a good income using your brain, you can move yourself overseas and do the same thing.

    Big-tax types in the US still haven’t figured out something even western Europe is learning: the world doesn’t give a fig about your ideology or “social justice” dreams. If you try to squeeze excessively, the thing you’re squeezing will go elsewhere, or may simply go away.

    For businesses that have expensive physical plant, it may be slow; in a high-tax town, local plants aren’t expanded and eventually close, while remote plants open and are invested in, but eventually it all goes away if high-taxers run things too long. Detroit is an obvious example, but also look at Boeing and Seattle.

  8. Stacey Says:
    November 12th, 2009 at 6:42 pm

    Foobarista, any US citizen’s income is taxed no matter where they reside, so moving abroad will do nothing except provide a change of scenery.

    http://www.irs.gov/app/vita/international/15/15_03_005.html

  9. Foobarista Says:
    November 12th, 2009 at 6:46 pm

    Stacey, you can always get dual citizenship, or simply ignore it. Just because it’s in a lawbook somewhere doesn’t mean it matters.

  10. Foobarista Says:
    November 12th, 2009 at 6:53 pm

    OK – that was a little flip, but there are numerous American citizens living and doing business in places like China or Singapore that report minimal taxes to the US, and there’s pretty much nothing the IRS can do about it unless they do something dumb. Chinese companies often pay in cash, and could care less about some foreign outfit called the IRS.

  11. Sam Says:
    November 12th, 2009 at 7:05 pm

    Stacy,
    Are you aware of all the people from foreign countries that used to live and work in the USA (ie: Silicon Valley)who have decided to move back to China or India or wherever the came from because they feel that working in the USA is no longer worth the hassle and taxes? I’m not talking about some housekeeper from Haiti or gardener from south of the border, but engineers, doctors, entrepreneurs. These people used to come to the US, start companies, invent stuff, and make themselves and others rich. Now they are finding the opportunities better in the countries that they emigrated from. They are only the tip of an iceberg of people and capital fleeing from a country that is increasingly hostile to high earning people. If you think that you can somehow fence these people in and force them to fund your government benefits, you are sadly mistaken.

  12. TMS Says:
    November 12th, 2009 at 8:50 pm

    Scary deficits, super-scary unfunded retirement mandates, the continuing targeting of the successful by the “progressive” taxation crowd…

    Being considered “rich” according to our momentary working income by the socialists…looking at the possibility of a “wealth tax”

    My wife and I will never be rich as we would define it – but 10 years from now when we’re 55, the house is paid off and we can work anywhere in the world courtesy of cheap air travel and the Internet…good God, Panama City is looking better with each passing year.

    We damm sure will take the money and run if that’s what it takes to keep a fair share of what we earned.

    And the takers of society in the US will be worse off for it.

  13. Stacey Says:
    November 12th, 2009 at 10:24 pm

    Sam, why are you directing your comment to me? I’m talking about American citizens who s/b reporting their world-wide income in direct resonse to Foobarista’s hint of avoiding taxes by moving abroad. I don’t give a crap what other people are doing who return to their homelands (i.e. who were never US citizens in the 1st place. And no, I don’t want anyone paying for gov’t benefits, esp me! I want the gov’t to get the hell out of my life.

  14. BG Says:
    November 13th, 2009 at 11:01 am

    #12) Yeah, it is unfair for the person with a larger share of the wealth to pay a larger share of the taxes!

  15. JLP Says:
    November 13th, 2009 at 11:20 am

    Byron,

    If the rate were the same, the wealthy would be paying more in taxes.

  16. BG Says:
    November 13th, 2009 at 12:58 pm

    JLP) I just ran some numbers, and if we had a flat-income tax, then people earning under $90k (60% of the population) would pay about 31% of the total taxes, even though they only have 14% of the total wealth.

    The specific group hurt the most is the earners between $50k – $60k, where they only have 1.7% of the wealth, yet would pay 5.26% of the taxes.

    And, not surprisingly the specific group helped the most with a flat-income tax is the “rich”, income above $200k who have 35.69% of the total wealth, yet would only pay 25.6% of the taxes.

    A flat-income tax is regressive, because it makes the people who are least able to pay, pay a larger share.

    * I did these calculations based on the data provided at:
    https://www.networthiq.com/explore/net-worth-statistics.aspx

    I’m emailing you my spreadsheet if you care to look at the numbers.

  17. Foobarista Says:
    November 13th, 2009 at 2:29 pm

    14: we don’t tax wealth (except for property taxes). We tax cashflow, which is very different.

    This is why it was silly for Obama to say “let’s spread the wealth” when he was talking about raising various cashflow taxes.

    Now, there’s lots of reasons why taxing wealth is a bad thing, but the people who scream loudest about taxes are people with high cashflow but relatively little wealth.

    I have a little “tax pain” metric, which is annual taxes paid divided by net worth. It is interesting in that it is very high and often infinite for most poor people (poor measured by usual cashflow metrics), lower for much of the middle class, gets high again for professional-class people, and drops precipitiously once people’s net worth gets above $5M or so, and becomes vanishingly low for billionaires.

  18. Mark Says:
    November 13th, 2009 at 4:01 pm

    @Foobarista: I have a little “tax pain” metric which is annual taxes divided by government benefits consumed. It is zero for poor people who selfishly consume benefits but don’t pay tax, average for middle-class people who do both, and astronomcally high for rich people who consume almost nothing but pay the most tax.

    By the way, benefits used includes driving on free roads, going to public schools, as well as the usual unemployment benefits, medicaid, medicare, etc., etc.

    Only cashflow should be taxed. If I am smart enough to save mine, and you foolish enough to consume yours, why should I later be taxed on my savings?

  19. Foobarista Says:
    November 13th, 2009 at 4:14 pm

    My metric is more interesting as a gauge of political attitudes than it is as anything I’d use to determine “fairness” – particularly why so many very rich people advocate high taxes on cashflow.

    Personally, I’d tax consumption, not income, with some fiddles to make sure the poor don’t get hit too hard. I’m not sure I love all the particulars of the “fair tax”, but I like the idea.

  20. BG Says:
    November 14th, 2009 at 1:39 am

    #18) Good one! Since the rich get no benefits from the government, I say we release all the prisoners we have locked up.

    Hope you can afford your own military, because it not my house that the mob will be after.

  21. JLP Says:
    November 14th, 2009 at 8:45 am

    BG,

    No one is saying that the rich don’t get benefits from the government. The question is: do they get benefits above and beyond the average American because they are rich? I would say other than having more property to protect, the answer is no.

    If anything, I’d say the poor are much more dependant on the government.

  22. Investing 101 Says:
    November 14th, 2009 at 11:30 am

    I’ve seen the video that kenyantykoon refers to. I think it’s called “Buffet & Gates go back to school” and there have been interesting points made by both Gates and Buffett in regards to how much (or little actually) of their income they pay in taxes. I’m gonna try and see if I can get it again and contribute their comments to this interesting conversation

  23. kitty Says:
    November 14th, 2009 at 6:03 pm

    I agree with Foobarista. Consumption tax is the only fair tax. Also, that if dividends are to be taxed at normal rates, they shouldn’t be taxed at corporate level. Taxing the same money twice isn’t right.

    Additionally, favorable treatment of long term capital gains and investment dividends promotes investment rather than day trading.

    BG – life is not fair from many perspectives. Some people are born rich and some poor, some are luckier than others, some are more talented and some are smarter; some are able to do what they love and some can only dream and settle, some have children some aren’t able to have them, some are healthy and some get sick. We all need to learn to live with it and make the best of what we’ve got. You may feel you are poor, but there are people in the world who would consider you are rich. Some may consider you lucky for having never experienced hunger.

    Taxes from net worth is simply a theft i.e. taking somebody’s savings. It’s likely to hit not the super rich who, as Foobarista said would simply hide their money, but older people who’ve worked for their whole life, saved some money so that they can have retirement. When you get older, and have some savings, let’s see if you still think the same. Plus, what you are advocating is redistribution. This has already been tried – in a country I grew up in, for example – and it didn’t work. All it got is everyone being equally poor except for government elite who could hide their wealth. Also, if you tax net worth, you remove incentive to save money.

    Also, BG, you forget who sings your paycheck. When you tax the rich corporation or a “rich” business owner or a rich investor, you tax your employer or investor in your company. The company responds by cutting costs which includes 1) moving jobs elsewhere 2) cutting your salary 3) cutting benefits. A good exercise for anybody who works for a publically traded company is to read their employer quarterly report – regardless of your having the stock or not, at least the brief summary version on yahoo finance. You’d soon find out how a bad report reflects on your benefits and salary increase as well as job security. After you’ve done it for a while, you’d be less likely to want to tax either your employer or investors in your employer.

  24. Hogan Says:
    November 15th, 2009 at 11:19 pm

    While I agree that everybody should pay taxes even if it is a low percentage of their income–the idea of a flat tax is a bad idea. I will be for a flat tax when the children of people who are in the 35% tax bracket go to Iraq and Afghanistan in the same percentages as the children whose parents are in the the 10% tax bracket.

  25. Foobarista Says:
    November 16th, 2009 at 12:25 am

    This is where “fairness” meets “efficiency”.

    Fairness on such things as taxes only works in a vacuum – that is, it only works with an omnipotent global government if “fairness” means “various flavors of soak the rich”. Even there, massive taxes end up killing economic activity.

    I’m sure someone will trot out the old story about the 90% tax rates in the Eisenhower administration or other times in the mid to late 20th century. The difference between now and then is much of the world was “offline”, either destroyed by war or under Communism (or both). (Also, those nominal tax rates were easily dodge-able by a tax lawyer with a pulse.)

    Now, there are numerous other places to go if you want to do business. They are often better run than the US, and even western Europe doesn’t have the sense of entitlement to world money flows that the current crop of American leaders have.

  26. jimmy37 Says:
    November 16th, 2009 at 10:50 am

    What is it about a flat tax you folks don’t understand??

    Why should I pay more tax than you just because I have more money than you? If I don’t spend that money, I don’t get any advantage from it! If two people spend $50,000 a year, they should pay the same tax. If one person has 10 kids and the other person has an extra $10,000, does that mean their taxes should be different? NO! How people choose to spend their money or not is their business. Taxes must be based on spending, not on earning.

  27. BG Says:
    November 16th, 2009 at 12:26 pm

    All) my view is that the taxes should be in proportion to wealth. If someone has 95% of the wealth (and me 5%), then they should pay 95% of the taxes, and I pay 5%.

    I don’t care if the taxes are done with income, consumption, or a wealth tax (that is just the vehicle for collection). In the end, though, it should be the person with the majority of the property/wealth/whatever that pay the majority of the taxes.

    This is my mind is “flat/fair”. If the person with 95% of the wealth pays _less_than_ 95% of the taxes, then the poorer fellow is paying a larger share of the taxes (regressive taxation). The person least able to pay (the 5% person), is paying a larger (relative) share of the taxes.

    If you don’t like this idea, then what do you propose? A flat-rate that every man, woman, and child pays exactly $10k no-matter their wealth? The homeless person pays $10k just like the billionaire?

  28. Foobarista Says:
    November 16th, 2009 at 1:52 pm

    Before talking about taxes, we have to talk about government, and after that, we should take a “Singaporian” attitude that we want to fund the government by the most efficient, least economically impactful means necessary, without getting bent out of shape about “fairness”.

    The problem is that ultimately, inefficient taxes that chase off capital create unfairness by killing the economy, even if they feel good in a populist sense. You have a lot more latitude for “fair” outcomes in a healthy, growing economy than in a shrinking one.

    Is life more fair in Dallas or Detroit? Dallas has a typical Texan hard-edged attitude toward taxes, and a much smaller government. Detroit has been run by populists preaching fairness for generations, and has been destroyed by it as effectively as a WWII bombing campaign.

  29. Sam Says:
    November 16th, 2009 at 2:54 pm

    Stacy,
    Sorry if I attributed something to you that I shouldn’t have.

  30. Stacey Says:
    November 16th, 2009 at 4:19 pm

    No problemo, Sam. I know that we’re usually on the same page!

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