How Dividend Tax Works

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Dividend tax is a form of income tax that a country levies on dividends. As can be expected, dividend tax rates vary by country. And in some cases it entails a double tax problem, in relation to its implementation and response from the shareholders.

This arises from the fact that companies pay income taxes, capital taxes and then shareholders pay additional taxes on income from dividends.

In most countries, dividend payments are regarded as normal income, while in others dividend income is separated from ordinary income and is subject to dissimilar tax rates, if any. The tax is also the subject of contention, as many question its application.

President George W. Bush pledged in 2003 to eliminate dividend taxes in America. The main argument for removing it involves the issue of double taxation – first as a tax on corporate profits and then taxes on personal income.

Critics claim that the abolition of dividend tax has little effect on 60% of salaried workers in lower classes. And that it largely reduces taxes for 20% of the upper classes, hence the middle class and above will have surplus money to invest long term, including investment securities.

The double taxation of corporate dividends has been reduced to a minimum in places such as Australia since the introduction of a revised system. In the Netherlands the tax on dividends is 1.2% on the value of the shares, regardless of the dividend, as part of the uniform tax policy on savings and investment.

Some indicate that the dividend functions as a justification for management’s inherent bias for expansion, even if it does does not culminate in shareholder returns.

A corporation is separate from its stockholders, and has legal existence of its own, as such it has the right to make use of  public utilities, and thus should contribute through taxes.

When a company decides to increase capital, they find that the interest payments on debt are taxed only once while the dividend payment through the sale of stock is taxed twice. High levels of debt will lead the company to lay off workers. Double tax on dividends therefore increases the severity of the downturn in an economic cycle.

Sixty percent of salaried lower class workers are more disadvantaged than the rest in the face of layoffs and recession. Based on the negative impact of leverage on economic cycle, the perspective of macroeconomics is that it is far more appropriate when there is double taxation on dividends rather than by reducing the level of deduction on interest.



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