NCPA - National Center for Policy Analysis

Dividend Reforms Move United States Closer to Other Industrialized Countries

January 9, 2003

President George Bush's tax cuts on stock dividends would bring the United States closer in line with other industrialized countries, according Alexander Klemm, research economist at the Institute for Fiscal Studies in London.

  • However, a notable feature of the U. S. reform is that unlike many other countries, it would completely abandon a progressive approach to dividend taxation.
  • The U.S. is currently one of only four Organization for Economic Cooperation and Development (OECD) countries that apply the so-called pure classical system of double taxation on dividends.
  • Many other OECD countries, including Japan and Sweden, operate a hybrid classical system that provides some relief from double taxation of dividends by imposing a lower flat rate on dividends instead of an income tax.

Michael Devereux, an expert on international corporate taxes in the U.K., said he did not expect Bush's reforms to stimulate more investment by companies.

The majority of capital spending by companies is financed from retained earnings, rather than equity issuance, and dividend taxation makes no difference to the returns companies get on their investments.

In economic theory, tax policy should be neutral. The level and structure of taxation should not distort behavior by encouraging companies and consumers to favor one action over another. The double taxation of U.S. dividends appears, however, to have encouraged companies to favor share buy backs instead of dividends, which may have contributed to the stock market bubble of the late-1990s.

Source: Andrew Parker, Ed Crooks, and Philip Coggan, "Dividend Reform Brings U.S. Closer to Competitors," Financial Times, January 8, 2003.


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