Dividends: Where to Tax Them?
I’ve heard a few arguments, from people whose judgment on economic matters I respect, that President Bush should have made dividends deductible at the corporate level rather than the individual level. I’d always been taught that it made no (or almost no) economic difference. The arguments don’t seem persuasive, either. 1) A corporate cut would supposedly be more powerful, because a lot of dividends are paid out to pension funds and thus already untaxed. But if the dividends aren’t being taxed at the payee level, what’s the justification for not taxing them at the corporate level? The point of the tax cut is to eliminate double taxation, not give special treatment to dividends. 2) Doing it at the corporate level would look like fixing a quirk in tax law, not giving a favor to rich people, and thus would be politically easier. Really? Wouldn’t a tax cut for corporations be harder to sell? 3) The double taxation of dividends distorts corporate decisions, so it’s at the corporate level that it should be eliminated. But the same effects should happen as investors’ incentives to get dividend-paying stocks increases. Supply-sider Alan Reynolds points out one disadvantage to doing it at the corporate level: Companies could end up with no tax liability to write off when depreciating business expenses—thus creating a disincentive to investment. So, in sum and in short, I’m with Bush on this one.