NCPA - National Center for Policy Analysis

Dividends as a Social Good

January 29, 2003

Eliminating double taxation of dividends would contribute to the nation's financial and social welfare in many ways, analysts contend.

Suppose a dividend-paying corporation makes $100 for a shareholder. First, 35 percent is taxed away at the corporate level. Then perhaps another 30 percent is eliminated through individual taxes. Add in state and local taxes of perhaps 5 percent to 6 percent -- and the $100 profit has dropped in value to about $43.

But setting aside the immediate financial impact on shareholders, double taxation has warped corporate policies in other unfortunate ways. The tax consequences have prompted corporations to retain their earnings. Dividends now represent 30 percent of corporate earnings -- down from 60 percent about 40 years ago.

  • As corporations have amassed and locked up piles of money, investors are robbed of their ability to invest capital in other, higher-return companies.
  • Dividends signal to the market that a corporation's earnings are real and the public takes comfort in holding dividend-paying stocks, even in down markets.
  • Encouraging firms to pay out more in dividends will bring a greater measure of transparency to corporate accounting, since is nearly impossible to know what a firm's true profits are under the current system.

Since dividend tax relief will go only to shareholders of firms that pay taxes, corporations will have to provide an accounting on the percentage of profits not taxable as dividends. Investors can then back out the number for actual taxes paid -- giving them a clearer notion of profits.

In this way, President Bush's plan will impose more sunshine on corporate accounting -- and that's a social value.

Source: Editorial, "The Corporate Reform Tax Cut," Wall Street Journal, January 29, 2003.

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