Saturday, April 10, 2010

Taxation of Dividends

Making dividends exempt from income taxation is anathema to liberals and perhaps a majority of the US population, because its direct beneficiaries are the wealthier half of the population and the amount of the benefit would be directly proportional to how rich you are. A sizeable minority of the population, those owning no stocks, would not benefit at all. One could argue, however, that a number of social problems would be alleviated by having corporations increase their dividends. If we can identify steps that would lead to larger dividends, such as through the tax code, they should be considered. For example, I suggest that in exchange for a slightly higher corporate income tax rate, any dividend paid out of retained earnings be tax free to the investor. The benefits of greater dividends include the following.

1. There would be less reliance on net income accounting in determining profitability of a corporation. Dividends now are a small fraction of earnings, and earnings are the prime focus of investors in evaluating stocks. With the focus on earnings, there is a strong temptation to inflate non-cash income in reported earnings, undermining investor confidence and creating volatility in asset prices. An increased focus on dividends would also reduce fraud along with more benign forms of bias in reported earnings.
2. Resources would be invested more efficiently because there would no longer be a tax rationale for hoarding cash.
3. Retirees would draw more income from the dividends on their stocks and there would be less pressure on Americans to save massively for retirement. If dividends are 2% to 3% as they are now, Americans need to save about $2 million to receive $50,000 per year in dividend income. They could obtain additional funds by selling appreciated shares, but buying and selling shares is a fundamentally speculative activity, not an appropriate foundation for retirement planning for a broad segment of society. Doubling the dividend rate cuts the target in half.

Saturday, February 27, 2010

employment taxes

It seems odd that in this era of the jobless recovery and declining real median income that we are still taxing employment. The 7.5% social security, unemployment insurance, workers comp, though they're all unimpeachable uses of funds, all make it more expensive for businesses to hire people. Health insurance also famously adds to the cost of hiring. In this high-productivity and low-employment growth era, it's high time we found another economic transaction to piggyback on. I'd love to see a federal sales or excise tax, and if it were coupled with a lower tax on employment-based social security who would complain? Another possibility would be catalog and internet shopping. People owe use tax to their home state on those transactions already, but states probably need federal help to enforce those liabilities.

The jobs bill is fine, but we should recognize that the jobs problem isn't temporary. Jobs are disappearing. Since the 1980s, companies have been avoiding hiring and finding alternative ways of responding to growth. I have no doubt that most people will make do perfectly well in their new entrepreneurial / consulting / temp / home office careers. But stable jobs are a good option for most people and for the economy and we should adjust our tax system to promote them.