Dividend Tax Cut Benefits
Companies sometimes pay investors directly with profits, often called a dividend. Like all income, earnings from dividends are subject to taxation. Proponents of a tax cut on dividend earnings often cite the double-dip the federal government takes on the trickle of corporate profits to investors. Lowering the dividend tax could also prevent accounting methods that hide a company's true profits. Critics of dividend tax cuts believe that they unfairly benefit the upper class.
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Identification
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Not every company pays a dividend to investors, only ones that want their investors to hold onto stock. Investors on Wall Street are constantly seeking companies that experience high growth; 15 percent is about standard for what an investor wants to see. Most companies reach a point where they cannot expand their market presence. To prevent people from selling stock and searching for higher growth potential, a company will offer a cut of the profits for each stock option.
Reduces Investor Risk
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According to the National Center for Policy Analysis, the United States has the second highest tax rate on dividend payments, up to 38.6 percent for individuals and 35 percent for corporations. Because of this high rate, companies often choose to try to raise the value of stock, rather than see a large portion of investor wealth go to the federal government. This often leads to companies taking on debt to expand and raise stock prices, because interest on corporate debt is tax deductible. Lower levels of corporate debt reduce the risk of a company going bankrupt in troubled times, and motivates companies to sell shares to raise money instead of taking loans.
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Reduces Double Taxation
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According to the Cato Institute, one of the major criticisms of the corporate tax system is the effective double tax on dividends. Under current U.S. tax law, corporate profits are taxed at 35 percent. Dividend income is then further taxed when paid to stockholders; in 2003 this was as much as 38.6 percent for individuals. When combined, this amounted to a 60 percent tax on corporate profits before President Bush lowered the dividend tax in 2003.
Investor Confidence
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According to a Cato Institute report on the benefits of a dividend tax cut, increasing the incentive to provide dividends to shareholders increases investor confidence, especially after the accounting scandals of the early 2000s. A corporation that distributes profits to investors cannot easily "fake" company earnings to boost stock values. They would have to provide real earnings to investors instead of higher stock prices.
Criticism
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Critics, such as the Center on Budget Policy Priorities, found that those in the upper income brackets are the main beneficiaries of a dividend tax cut. A 2006 report by the CBPP found that forty percent of dividend distributing stock is held in tax-free retirement accounts, the type which most middle and lower income families own. Because the wealthy are much more likely to see any gains from a dividend tax cut, it is often pejoratively called a "tax cut for the rich."
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