The High Tax Burden on Dividend Income in the United States

March 12, 2014

Corporations distribute dividends, paid from after-tax profits, to their stockholders, who are then required to pay personal income taxes on the dividends. The tax is a double tax on corporate profits, creating a bias toward retained earnings and leading to lower levels of saving and investment, says Kyle Pomerleau, an economist at the Tax Foundation.

  • At the federal level, the top marginal tax rate on dividend income is 23.8 percent.
  • State dividend tax rates range from zero to 13.3 percent, making the average top marginal rate in the United States 28.6 percent.
  • This is the 9th highest top marginal tax rate on dividend income worldwide, and it is 5 percentage points higher than the Organization for Economic Cooperation and Development average rate of 23.2 percent.

Because the personal dividend tax is a tax on profits that have already been taxed at the corporate level, it serves as double taxation on income.

  • For example: A corporate profit of $100 must pay the corporate income tax rate of 39.1 percent, leaving it with $60.90 in after-tax profits. The corporation then distributes those profits as dividends to stockholders, who have to pay 28.6 percent (or $17.41) on the dividends. In total, the tax burden on corporate profits adds up to $56.52, a 56.5 percent tax rate.
  • This taxation encourages firms to retain earnings and increase their investors' capital gains -- which have generally been taxed at rates lower than dividend are taxed -- rather than distribute the profits. Between 1984 and 2002, the number of firms distributing profits as dividends declined. But when the dividend tax rates were lowered to 15 percent in 2003 and the bias between capital gains and dividends eliminated, the number of firms paying out dividends increased.

Individuals are incentivized to consume rather than save due to high dividend taxation. As such, companies are left with less capital for machines and factories and additional investment opportunities, all leading to lower wages for workers and slow economic growth.

Source: Kyle Pomerleau, "The United States' High Tax Burden on Personal Dividend Income," Tax Foundation, March 5, 2014.

 

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