The Tax Burden on Personal Dividend Income across the OECD 2015

June 25, 2015

Key Findings:

  • The average combined federal, state, and local top marginal tax rate on dividends in the United States is 28.6 percent – 9th highest in the OECD.
  • Taxpayers in California face the highest dividend income tax rate in the United States at 33 percent.
  • The U.S. average top marginal tax rate on dividend income of 28.6 percent is 4.5 percentage points higher than the simple average across industrialized nations of 24 percent and 1.5 percentage points higher than the weighted average.
  • The average tax rate on personal dividend income has increased across the OECD in the past decade.
  • The taxation of dividend income can create a double-tax on corporate income, increases the cost of capital, and reduces investment in the economy.

Introduction

Dividends are payments made by a corporation to an individual who owns stock in that corporation. Corporations distribute these dividends to investors from their after-tax profits. Once these shareholders receive this dividend income, they must pay personal income taxes on it. Unfortunately, taxpayers in the United States currently face a high tax burden on personal dividend income.

The United States’ top federal marginal tax rate on qualified[1] dividend income is 23.8 percent. Individual states also tax dividend income at rates ranging from zero to 13.3 percent.[2] Combined, the U.S. average top marginal tax rate is 28.6 percent. Internationally, U.S. taxpayers face the 9th highest top marginal tax rate on dividend income, which is about 4.5 percentage points higher than the average tax rate of 24 percent across the 34 countries of the Organisation for Economic Co-operation and Development (OECD).

The personal dividend tax is a double tax on corporate profits that contributes to a high tax burden on capital. In the past, higher dividend taxes created a distinct tax bias toward corporate retained earnings. Dividend taxes also lead to lower savings and investment, a smaller capital stock, lower wages, and slower economic growth.

Dividend Taxation in the United States

The current federal top marginal tax rate on dividend income is 23.8 percent for taxpayers with an adjusted gross income of $200,000 or more ($250,000 or more for married taxpayers filing jointly). This includes a 20 percent rate on dividend income plus a 3.8 percent tax on unearned income to fund the Affordable Care Act. States also tax personal dividends at top marginal rates that range from zero in states with no personal income tax,[3] such as Alaska, Florida, and Nevada, to 13.3 percent in California (Table 1).[4]

Taking into account federal, state, and local tax rates on dividends, deductibility of state and local taxes, and the phase-out of itemized deductions,[5] combined top marginal tax rates on personal dividend income range from 25 percent in the seven states with no personal income tax[6] to 33 percent in California. The average combined top marginal personal dividend income tax rate across the United States is 28.6 percent.[7]

Chart 1.

The United States Has the 9th Highest Dividend Tax Rate in the OECD

The United States’ top marginal tax rate on personal dividend income of 28.6 percent is approximately 4.5 percentage points higher than the OECD average of 24 percent, about 1.5 percentage points higher than the OECD weighted average (weighted by GDP), and ranks as the 9th highest of these 34 countries. The highest personal dividend tax rate in the OECD is 51 percent in Ireland. Only two countries (Estonia and the Slovak Republic) do not tax personal dividend income (Table 2).[8]

Personal Taxes on Dividend Income Have Increased across the OECD over the Past Decade

In 2000, the average top marginal tax rate on personal dividend income was 24.4 percent (34.9 percent weighted by GDP) in the OECD (Chart 2). The higher weighted average was driven by the fact that the United States had a top marginal dividend income tax rate of 46 percent. Between 2000 and 2004, many OECD countries cut their top marginal dividend income tax rates, some countries cut them dramatically. For example, the Netherlands reduced its top rate by 35 percentage points from 60 percent to 25 percent, and Japan reduced its rate by 33.6 percentage points from 43.6 percent to 10 percent. The United States reduced its tax rate by 25.5 percentage points from 46 percent to 20.5 percent. The average rate across the OECD declined from 24 percent (34.9 weighted) in 2000 to 20 percent (20 percent weighted) in 2004.

From 2004 to 2009, top marginal tax rates on personal dividend income remained steady throughout the OECD. The OECD average was about 20 percent (both the simple and weighted averages).

After the global recession, several countries began raising their dividend tax rates.[9] Between 2009 and 2015, the average OECD tax rate increased from 20 percent to 24 percent (27.1 percent weighted by GDP). Eighteen of the 34 OECD countries increased their top marginal dividend tax rates during these 6 years. The United States was one of the countries to increase its top marginal dividend tax rate. At the end of the year in 2012, the top marginal dividend tax rate in the United States increased from 20 percent to 28.6 percent as part of the “Fiscal Cliff” deal and the Affordable Care Act.

Chart 2.

Economic Issues with the Personal Dividend Tax

The United States currently places a heavy tax burden on personal dividend income. The U.S. personal dividend tax is a double tax on corporate profits, biases corporate behavior, and leads to lower savings, less investment, lower wages, and lower living standards for all.

A Double Tax on Corporate Profits

The personal dividend income tax is the second tax on corporate profits and contributes to the double taxation of corporate income. Suppose a corporation earns a profit of $100 (Table 3). It then needs to pay the combined federal and state corporate income tax rate of 39.1 percent ($39.10 corporate tax bill).[10] Its after-tax profit is $60.90. The corporation then distributes these after-tax profits as dividends to its stockholders. The stockholders then need to pay the 28.6 percent combined federal and state personal dividend tax rate on the dividends ($17.41 dividend tax bill). In total, the tax burden on the corporation’s profit is $56.52, for an integrated tax rate of 56.5 percent, which is the second highest in the OECD.[11] The United States’ two layers of corporate taxation places a heavy burden on corporate investment, especially considering the United States also has the highest statutory corporate income tax rate in the OECD.[12]

 

Table 3. Total Tax Burden on Distributed Corporate Profits

Corporate Level

 

 

 

Corporate Profit

 $100.00

 

Corporate Income Tax Rate

39.10%

 

Corporate Income Tax

 $39.10

 

After-Tax Profit

 $60.90

Individual Level

 

 

 

Distributed Profits

 $60.90

 

Personal Dividend Tax Rate

28.60%

 

Personal Dividend Tax

 $17.42

Total Tax

 

 $56.52

Total Tax Rate

 

56.5%

 

 

Biases Corporate Behavior

This heavy tax burden on corporate investment can bias corporate behavior. Specifically, it can alter how corporations earn returns for investors. Over the past thirty years, personal dividend income has generally faced higher tax rates than capital gains income.[13] Due to this tax differential, corporations had an incentive to retain their earnings, increasing investors’ capital gains rather than distributing profits through dividends. As a result, the number of firms that distributed their profits through dividends consistently declined between 1984 and 2002. However, in 2003, the dividend tax rate was lowered to 15 percent, and the tax bias between capital gains and dividends was nearly eliminated. Following this change, the number of firms offering dividends drastically increased the next year.[14]

Creates a Bias against Saving and Investment Leading to Lower Living Standards for All

In addition to biasing corporate behavior, high taxation on corporate profits through high dividend taxes creates a bias against saving and investment. Due to high dividend taxation, people will prefer present consumption over saving, resulting in lower levels of investment and less capital in the future. For investors, this means less available capital for factories and machinery and fewer investment opportunities. For workers, this represents lower levels of productivity and lower wages. In all, there will be slower economic growth and lower living standards for everyone.[15]

Conclusion

Currently, the United States has the ninth highest top marginal tax rate on personal dividend income in the OECD. The combined burden of federal, state, and local taxes on dividend income creates marginal rates that exceed the dividend tax rates of most of the United States’ major trading partners. Reducing this tax burden on savings and investment will lead to faster economic growth, higher wages, and better living standards for all.

Table 1. Top Marginal Tax Rate on Personal Dividend Income, by U.S. States, 2015

Rank

State

State Rate

Combined Rate

1

California

13.3%

33.0%

2

Hawaii

11.0%

31.6%

3

New York*

8.8%

31.5%

4

Oregon

9.9%

31.0%

5

Minnesota

9.9%

30.9%

6

New Jersey

9.0%

30.4%

7

Vermont

9.0%

30.4%

8

Maryland*

5.8%

30.3%

9

Maine

8.0%

29.8%

10

Wisconsin*

7.7%

29.6%

11

Iowa*

9.0%

29.6%

12

Idaho

7.4%

29.4%

13

Arkansas*

7.0%

29.2%

13

South Carolina*

7.0%

29.2%

15

Montana*

6.9%

29.1%

16

Nebraska

6.8%

29.1%

17

Connecticut

6.7%

29.0%

18

Delaware

6.6%

29.0%

19

West Virginia

6.5%

28.9%

20

Georgia

6.0%

28.6%

20

Kentucky

6.0%

28.6%

20

Missouri

6.0%

28.6%

20

Tennessee

6.0%

28.6%

24

Rhode Island

6.0%

28.6%

25

North Carolina

5.8%

28.5%

25

Virginia

5.8%

28.5%

27

Ohio*

5.3%

28.3%

28

Oklahoma

5.3%

28.2%

29

Massachusetts

5.2%

28.1%

30

Mississippi

5.0%

28.0%

30

New Hampshire

5.0%

28.0%

30

Utah

5.0%

28.0%

33

New Mexico*

4.9%

27.9%

34

Louisiana*

6.0%

27.9%

35

Colorado

4.6%

27.8%

36

Indiana*

3.3%

27.8%

36

Kansas

4.6%

27.8%

38

Michigan*

4.3%

27.7%

39

Arizona

4.5%

27.7%

40

Alabama*

5.0%

27.4%

41

Illinois

3.8%

27.2%

42

Pennsylvania

3.1%

26.8%

43

North Dakota*

3.2%

26.3%

44

Alaska

0.0%

25.0%

44

Florida

0.0%

25.0%

44

Nevada

0.0%

25.0%

44

South Dakota

0.0%

25.0%

44

Texas

0.0%

25.0%

44

Washington

0.0%

25.0%

44

Wyoming

0.0%

25.0%

 

D.C.

9.0%

30.4%

 

U.S. Average

 

28.6%

Source: Tax Foundation, Commerce Clearing House, and Author's Calculations.

* States either allow taxpayers to deduct their federal taxes from their state taxable incomes, have local income taxes, or have special tax treatment of personal dividend income.

 

Table 2. Top Marginal Tax Rate on Personal Dividend Income, by OECD Nation, 2015

Rank

Country

Rate

1

Ireland

51.0%

2

France

44.0%

3

Denmark

42.0%

4

Korea

35.4%

5

Canada

33.8%

6

United Kingdom

30.6%

7

Israel

30.0%

7

Sweden   

30.0%

9

United States

28.6%

10

Finland

28.1%

11

Portugal

28.0%

12

Australia

27.1%

13

Norway

27.0%

14

Germany

26.4%

15

Italy

26.0%

16

Austria

25.0%

16

Belgium

25.0%

16

Netherlands

25.0%

16

Slovenia

25.0%

20

Spain

24.0%

21

Chile

22.6%

22

Switzerland

21.1%

23

Japan

20.3%

24

Iceland

20.0%

24

Luxembourg

20.0%

26

Poland

19.0%

27

Turkey

17.5%

28

Mexico

17.1%

29

Hungary

16.0%

30

Czech Republic

15.0%

31

Greece

10.0%

32

New Zealand

6.9%

33

Estonia

0.0%

33

Slovak Republic

0.0%

 

OECD Simple Average

24.0%

 

OECD Weighted Average

27.1%

Source: OECD Tax Database and Ernst and Young.

 



[1] Qualified dividends are dividends that are paid by a U.S. corporation or qualifying foreign corporation for stocks which have been held for more than sixty days. See Internal Revenue Service, Publication 550 (2013), Investment Income and Expenses, http://www.irs.gov/publications/p550/index.html.

[2] Most states tax qualified dividends as ordinary income.

[3] Although New Hampshire and Tennessee have no personal income tax, they both tax interest and dividend income at 5 and 6 percent respectively.

[4] Tax Foundation, Facts &Figures 2015: How Does Your State Compare? See also Commerce Clearing House Intelliconnect database (subscription access).

[5] The Pease limitation on itemized deductions reduces many deductions by 3 percent for taxpayers with adjusted gross income exceeding $250,000 ($300,000 for married taxpayers filing jointly).

[6] This assumes individuals facing the top marginal rate have itemized deductions against which the Pease limitation is applied.

[7] The U.S. average is the combined federal, state, and local rates on dividend income, taking into account the Pease limitation and state/federal deductibility of income taxes weighted by dividend income in each state. For dividend income data, see Internal Revenue Service, Statistics of Income, Historic Table 2, http://www.irs.gov/uac/SOI-Tax-Stats---Historic-Table-2.

[8] OECD, OECD Tax Database, http://www.oecd.org/tax/tax-policy/tax-database.htm. Tax rates are the net top statutory rate paid by a shareholder, taking into account all times of reliefs and gross-up provisions at the shareholder level. See also Ernst & Young, 2013-2014 The worldwide personal tax guide, http://www.ey.com/GL/en/Services/Tax/The-worldwide-personal-tax-guide---Country-list.

[9] Over the same time period, countries have lowered their corporate tax rates.

[10] The combined federal and state statutory corporate income tax rate.

[11] Robert Carroll, The Economic Effects of the Lower Rate on Dividends, Tax Foundation Special Report No. 181, June 2010, http://taxfoundation.org/sites/taxfoundation.org/files/docs/sr181.pdf.

[13] Capital gains were taxed at the same rate as dividend income for a short period following the Tax Reform Act of 1986. The Omnibus Budget Reconciliation Act of 1990 reintroduced a small differential, and the Omnibus Budget Reconciliation Act of 1993 produced a large differential with dividends taxed at a top rate of 39.6 percent.

[14] Raj Chetty & Emmanuel Saez, Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut, Sept. 2004, http://business.illinois.edu/finance/papers/2004/chetty.pdf.

[15] See Carroll, supra note 10.

 

Follow Us

Tax Policy Blog

The official weblog of the Tax Foundation.

Go

Tax By State

For information on your state, select it from the drop-down menu.

 

Ask a Tax Expert

Contact information for Tax Foundation policy staff Ask