Dividend tax
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A dividend tax is an income tax on money paid to the owners of a company through dividend payments.
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Controversy
In the United States and many other jurisdictions, dividend payments are considered ordinary income and are taxed as such, the same as if the taxpayer had earned the income working at a job. Depending on the jurisdiction, interest income, collected rents, or other "unearned income" may also be taxed. It is the subject of recurring debate as to whether or not these taxes should be eliminated.
Arguments for abolition
Abolitionists argue that a dividend tax amounts to unfair "double taxation", in the sense that the company has already paid an income tax on these funds.[1] Some even argue for the elimination of all taxes on investment income including interest income and capital gains.
The bottom 60% of wage-earners already pay little in taxes but are probably harmed the most by the double taxation. When corporations decide how to raise their capital, they see that the interest payments on debt are taxed only once while the dividend payments on equity are taxed twice, thus the tax system favors going into debt and becoming highly leveraged. Highly leveraged companies must layoff or furloough more workers more quickly at the first signs of an economic downturn. The double tax on dividends thus increases the depth of recessions in the business cycle. It is the bottom 60% of wage earners that suffer more than the "rich" from layoffs and deeper recessions. Given the negative impact of leverage on the business cycle, a double tax on interest rather than dividends by reducing the deductability of interest, would avoid the bias towards leverage in the economy.
Arguments against abolition
Opponents of elimination claim that it is unfair to tax income generated through active work at a higher rate than income generated through less active means or that companies may not have paid their full share of income tax.
United States
In 2003, President George W. Bush proposed to eliminate the U.S. dividend tax saying that "double taxation is bad for our economy...[and] wrong...[and] falls especially hard on retired people". He also argued that while "it's fair to tax a company's profits, it's not fair to double-tax by taxing the shareholder on the same profits."[2]
Soon after, the Congress passed the a bill which included some of the cuts Bush requested and which he signed into law on May 28, 2003. Under the new law dividends are taxed at a 15% rate for most individual taxpayers. Dividends received by low income individuals are taxed at a 5% rate until December 31, 2007 and become fully untaxed in 2008. These provisions are set to expire on January 1, 2009.
Canada
In Canada, there is double taxation of dividends, but tax policy attempts to compensate for this through the Dividend Tax Credit or DTC for personal income in dividends from Canadian corporations. An increase to the DTC was announced in the fall of 2005 by Liberal finance minister Ralph Goodale just prior to the fall of the Liberal minority government, in conjunction with the announcement that Canadian income trusts would not become subject to double taxation as had been feared. Effective tax rates on dividends will now range from as low as 3% to over 30% depending on income level and different provincial tax rates and credits.
Other countries
In Finland, a double taxation will be in use as of 2005. Income tax is 29% for a stockowner and the total tax will be around 50%.
In the Netherlands there is a tax of 1.2 % per year on the value of the share, regardless of the dividend, as part of the flat tax on savings and investments.
In Romania there is a tax of 5% on the dividends with no double taxation.
In the UK, dividends are taxable at special rates and are paid with a notional tax credit that the recipient can then offset against his/her personal income tax bill. The tax credit represents the tax that the company has already paid on the profits represented by the dividend. Although the system is rather complex because of its special 'investment income' rates, the upshot of these and the tax credits is that dividends are not double-taxed.
In Australia dividends are taxed at the recipient's marginal tax rate (up to 48.5% as at January 2006). Australia has a Dividend Imputation system which allows franking credits to be attached to dividends. This allows recipients of franked dividends to impute (or credit) the corporate tax paid by the paying company. A recipient of a fully franked dividend on the top marginal tax rate will effectively pay only about 26% tax on the cash amount of the dividend .