US Will Have Highest Top Dividend Tax Rate

June 8, 2010 Taxation in USA

tax_2960New research indicates that the US will soon have the highest tax burden on corporate profits in the OECD, potentially leading to a decrease in the overall productive capacity of the US economy.

On June 7th the independent US think-tank Tax Foundation released The Economic Effects of the Lower Tax Rate on Dividends, a special report which analyzes the double-level of taxation on corporate profits in the US. According to the report, equity-financed investment profits in the US are taxed under corporate income tax and, subsequently, under personal income tax when profits are distributed as dividend payments. In 2011 the cumulative tax liability on corporate profits will increase to 67.6 percent, exceeding rates levied across all the OECD and G7 member nations.

The double-taxation “problem” is currently partially addressed by the Jobs and Growth Tax Relief Reconciliation Act of 2003. Although the Act will expire at the end of 2010, effectively raising the capital gains tax rate from 20 percent to a rate of 39.6 percent. The hike will be compounded by the introduction of a 3.8 percent Medicare Tax levy and a 1.05 percent to the individual-level State Dividend Tax Rate.

According to the report, the high level of double-taxation on corporate profits leads to a investment imbalance whereby productive corporate investments are unjustly considered inferior to other forms of investments. The tax burden also reduces to overall national levels capital formation and aggregate investment. The tax bias against equity-capital also leads to an over-reliance on debt financing, leading to inherently higher risks of corporate bankruptcy. The report summarized the situation, saying, “…by injecting tax considerations into investment decisions, the double tax reduces the productive capacity of the U.S. economy and serves, ultimately, to reduce the living standards of U.S. citizens.”

Photo by mondays child