Pardon the pun, Texans.
Here’s a depressing chart from Heritage Foundation. Before any of you complain about the political orientation of Heritage, I will point out that the chart is prepared with publicly available data from the IRS. As someone who pays a lot of income tax, it’s pretty irritating that essentially 50% of the country pays nothing in income tax. And furthering the frustration is the awareness of how this simple fact builds a bias into the system favoring political candidates who pander to the non-taxpaying 50%. Wonder why we can’t get entitlement reform?
I’m a big believer in the incentive nature of taxation. What you want more of, tax it less. What you want less of, tax it more. I’m also by virtue of my years as a lawyer a big believer in the stock market and its role in allowing corporations to raise capital in an efficient manner. I believe that actions and taxes which make it more difficult for our biggest businesses to raise money from investors has to be extremely harmful to our economic system. So today the Wall Street Journal reported this:
Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today’s 15% rate.
Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.
In previous budgets, Mr. Obama proposed an increase to 23.8% on both dividends and capital gains. That’s roughly a 60% increase in the tax on investments, but at least it would maintain parity between taxes on capital gains and dividends, a principle established as part of George W. Bush’s 2003 tax cut.
With the same rate on both forms of income, the tax code doesn’t bias corporate decisions on whether to retain and reinvest profits (and allow the earnings to be capitalized into the stock price), or distribute the money as dividends at the time they are earned.