Special Report No. 181
· Corporate profits are subject to double taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ation in the U.S.: The return on a new equity-financed investment is taxed under the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. and again under the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. when received by individual investors as dividend payment or realized as capital gains. This double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. 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 taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. 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.Share