"Buffett Rule" Will Make Top Dividend Rate Highest in OECD

February 9, 2012

Supporters of the proposed "Buffet Rule" argue that it is a necessary step to force the country's wealthiest to pay their fair share.  However, these supporters often fail to recognize its dramatic effects on capital markets, specifically for income from dividends, which will make the United States a much less attractive recipient for capital investment.  This will lower American firms' access to funds and damage our economy's vitality in the long run, says Scott A. Hodge, president of the Tax Foundation.

  • Absent the Buffet Rule, dividend yields are taxed on several levels: first as corporate profits (35 percent), second as dividend income subject to federal taxation (15 percent), and third as dividend income subject to state taxation.
  • When each of these levels is included, the United States maintains a current dividend income taxation rate of 52.1 percent.
  • This represents an improvement over the state of America's capital investment atmosphere 10 years ago, when this rate topped 67 percent.
  • Nevertheless, the current rate places the United States at fourth out of all Organization for Economic Cooperation and Development (OECD) countries for its high tax rate, trailing only France, Denmark and the United Kingdom.

This already high tax rate would be further increased by the proposed Buffet Rule, which would increase the individual dividend income rate paid by millionaires.  This would have the highly damaging effect of discouraging investment in American firms and making the United State an altogether unattractive country for capital.

  • The Buffet Rule would increase the rate paid by millionaires from 15 percent to 30 percent.
  • This would raise the highest dividend income tax rate from the aforementioned level of 52.1 percent to 62.1 percent.
  • Compared with an OECD average of 41.1 percent, this would give the United States the highest rate among all OECD countries.

Given its mobility and flexibility between markets, capital would respond to this higher rate by moving to friendlier climates.  This will have a negative impact on the United States and will damage its ability to compete with other developed countries.

Source: Scott A. Hodge, "'Buffett Rule' Will Boost Top Dividend Rate to Over 62 Percent, Highest in OECD," Tax Foundation, January 27, 2012.

For text:

http://www.taxfoundation.org/blog/show/27934.html

 

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