U.S. Would Have Highest Dividend Tax Rate

The expiration of the Bush tax cuts and new Medicare taxes on investment income that were part of recent health care reform will push the top effective tax rate on dividends in the U.S. to 68 percent in 2011 – highest among all industrialized nations, according to a new Tax Foundation report, "The Economic Effects of the Lower Tax Rate on Dividends."

Corporate profits first are taxed at the firm level and are subject to a combined federal and average state corporate tax rate of 39.1 percent. For income distributed as a dividend, the second layer of tax is then paid by individual shareholders, which prior to the enactment of health care reform legislation had a top rate of 17.3 percent. With the sunset of the 2003 Bush tax cut at the end of 2010, which will increase the federal dividend tax rate from 15 percent to 39.6 percent, and the new Medicare tax on investment income of 3.8 percent, the integrated effective dividend tax rate will rise dramatically to 68 percent. This is compared to an average rate of about 44 percent among OECD member nations and 47 percent among the larger G-7 economies.

The higher dividend rate would be in addition to the high U.S. corporate tax rate of 39.1 percent, second only to Japan among industrialized countries.

Read Tax Foundation Special Report, No. 181, "The Economic Effects of the Lower Tax Rate on Dividends."