Dividend payouts can either be used as cash for spending or as re-investment funds for investors, but corporations are wary to give it out because of taxes
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What is a dividend tax?
A dividend tax is a tax levied on cash payout from a publicly-held firm to its shareholders, in essence to 'share' the wealth from their operations. When this cash payout is made, it has already been taxes once at an average corporate rate of 35%. Once this goes through, a tax is taken on the remaining amount, based on the shareholder's income bracket.

Adverse Effects

  • Because of taxation, consumers seeks investments which do not provide a steady stream of cash and rely on capital gains to make a profit
  • Corporations prefer to issue debt rather than equity for financing purposes. That path has led to bankruptcy for several companies recently, such as Kmart Holdings, Inc.
  • Corporations also have a preferences of buying back stock to drive up the price of the stock and contribute to capital gains rather than issue dividends, which has become a rarity in this day and age.

    Why does it benefit everybody?

  • Dividend tax cuts in 1983-1984 and 1997 created a stimulus in tax revenue growth, in reality, despite the fact that a cut in taxes is inherently going to bring down tax revenues approximately $25 billion. That just goes to show the economic stimulus involved!
  • Allan Sloan, the Wall Street editor of Newsweek, says cutting the dividend tax to zero would raise stockholder wealth by $624 billion. Presidential adviser Glenn Hubbard estimates a $1.7 trillion boost in stock values. Neither figure is small change.
  • Figures from the IRS (2003) indicate that: 15 million tax returns in the 0-50,000 bracket ($26.9 b), 10 million tax returns in the 50,000-100,000 bracket ($27.1 b) and 4.8 million tax returns in the 100,000-200,000 bracket ($23.8 b), and 200,000 tax returns in the 1,000,000+ bracket ($23.8 b) reported dividend income. Stockholding has superceded every spectrum of American society, not just 'Rich CEO's'. 52% of Americans own shares in publicly-owned companies.
  • Dividend tax cuts increase liquidity and stability of the markets, both of which can encourage more consumer spending. The National Bureau of Economic Research in 1995 did a study on the 1986 tax cuts, finding that those affected did take advantage and change the systematics, by generating economic activity to offset government revenue losses
  • Approximately 50% of the savings, which would come from these cuts, would benefit those 9.8 million senior citizens who own stock and often depend on it for their income. (Avg. tax savings: $936.00)

    The action plan

  • Multiple layer dividend taxation can be eliminated via tax write-offs at corporate level, just as is done with interest payments, and consumers could receive tax credits as well
  • If consumers don’t take advantage of cash, they may choose to re-invest the funds back into the market, which is especially beneficial to the economy when institutional investors (esp. corp. which cross-hold) take advantage of this.

    Why might it not be worthwhile?

  • Approximately half of the $600 billion plan in place would be used towards eliminating the dividend tax, which would now just be taxes on the corporate level as corporate income
    However, the overall economic effect in the long run is predicted to outweight the financial cost due to economic stimulus
  • Foreign investors will benefit as well from these dividend tax cuts
    Foreign investors likewise make a contribution to the American economy through financing, operating and investing activities alike. The fact that these cuts would benefit them, as well, will mean their continued contribution to the stimulus.

    What has been done so far
    So far, the dividend tax rate has been slightly rolled down by 5% increments, but that is not enough to stimulate the economy and truly encourage dividend distribution. Still, major U.S. companies such as SBC Communications (A 35% increase) and Citigroup (A 75% increase) have either raised or started to distribute dividends as a result of this legislation. Microsoft, which had never issued dividends at all until January 2003, made a doubled payout in September 2003, much to the delight of its shareholders, who have not been encouraged by a lack of improvement in prices.

    What needs to be done
    The minimal dividend cut is not sufficient for America to enjoy the broad macroeconomic benefits. The willingness of companies to start making overtures even in the face of minimal cuts is just a taste of things to come. Contact your Senator or Congressperson and encourage them to push for more legislation which aims to diminish the dividend tax at both the corporate level and the personal level. You, the good citizen, are the one who benefits in the end.

    Works Consulted:
    Citizens for a Sound Economy. [http://www.cse.org/]

    Gleckman, Howard. The Dividend Tax Cut: Prepare for a Paler Version. Business Week. [http://www.businessweek.com/magazine/content/03_18/b3831045.htm]

    King, John. Bush to seek $600 billion economic boost. CNN MONEY. [http://www.cnn.com/2003/ALLPOLITICS/01/06/economic.stimulus/]

    Mann, Bill. The Truth About the Dividend Tax. The Motley Fool. [http://www.fool.com/portfolios/rulemaker/2003/rulemaker030108.htm]

    Michael, Norbert. Who Really Benefits from Dividend Tax Relief?. The Heritage Foundation. [http://www.heritage.org/Research/Taxes/CDA03-02.cfm]

    Reynolds, Allan. Stalked by Fears of Dividend Tax Cuts. The Cato Institute. [http://www.cato.org/dailys/01-03-03.html]

    Weinberg, Ari. Making The Dividend Tax Cut Work. Forbes. [http://www.forbes.com/home/2003/11/12/cx_aw_1112dividends.html]