The Economic Effects of the Lower Tax Rate on Dividends
Special Report No. 181
· Corporate profits are subject to double taxation in the U.S.: The return on a new equity-financed investment is taxed under the corporate income tax and again under the individual income tax when received by individual investors as dividend payment or realized as capital gains. This double taxation discourages productive capital formation and ultimately reduces wages and living standards.
· The U.S. partially addressed the double-tax problem in the Jobs and Growth Tax Relief Reconciliation Act of 2003, which synchronized and reduced both the tax rate on dividends and capital gains to 15 percent.
· The lower rates will expire at the end of 2010 with the capital gains tax rate rising to 20 percent and the dividends rate rising to 39.6 percent. Without any change in tax law, the top effective tax rate on dividends will rise from 50 percent prior to the passage of the health insurance reform legislation to 68 percent in 2011, a far higher rate than is levied in other G-7 and OECD nations
• When the high dividend tax rate is considered in conjunction with the high U.S. corporate tax rate-the second-highest among OECD countries, exceeded only by Japan-concern over the competitiveness of the United States as a place to locate investment can only grow.