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Posts Tagged ‘Dividend Taxation’

A good tax system (like the flat tax) does not impose extra layers of tax on income that is saved and invested.

I’ve tried to emphasize this point with a flowchart, and I’ve defended so-called trickle-down economics, which is nothing more than the common-sense notion that investment boosts wages for workers by making them more productive.

But if you doubt this relationship, just take a look at this chart posted by Steve Landsburg.

(H/T: Cafe Hayek)

That’s an amazingly powerful relationship. Wages for workers are very much tied to the amount of capital that’s invested. In other words, capitalists are the best friends of workers.

Something to think about with the President proposing big increases in the double taxation of capital gains. And something to consider since he wants America to have the highest level of dividend double taxation in the industrialized world.

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As discussed yesterday, the most important number in Obama’s budget is that the burden of government spending will be at least $2 trillion higher in 10 years if the President’s plan is enacted.

But there are also some very unsightly warts in the revenue portion of the President’s budget. Americans for Tax Reform has a good summary of the various tax hikes, most of which are based on punitive, class-warfare ideology.

In this post, I want to focus on the President’s proposals to increase both the capital gains tax rate and the tax rate on dividends.

Most of the discussion is focusing on the big increase in tax rates for 2013, particularly when you include the 3.8 tax on investment income that was part of Obamacare. If the President is successful, the tax on capital gains will climb from 15 percent this year to 23.8 percent next year, and the tax on dividends will skyrocket from 15 percent to 43.4 percent.

But these numbers understate the true burden because they don’t include the impact of double taxation, which exists when the government cycles some income through the tax code more than one time. As this chart illustrates, this means a much higher tax burden on income that is saved and invested.

The accounting firm of Ernst and Young just produced a report looking at actual tax rates on capital gains and dividends, once other layers of tax are included. The results are very sobering. The United States already has one of the most punitive tax regimes for saving and investment.

Looking at this first chart, it seems quite certain that we would have the worst system for dividends if Obama’s budget is enacted.

The good news, so to speak, is that we probably wouldn’t have the worst capital gains tax system if the President’s plan is enacted. I’m just guessing, but it looks like Italy (gee, what a role model) would still be higher.

Let’s now contemplate the potential impact of the President’s tax plan. I am dumbfounded that anybody could look at these charts and decide that America will be in better shape with higher tax rates on dividends and capital gains.

This isn’t just some abstract issue about competitiveness. As I explain in this video, every single economic theory – even Marxism and socialism – agrees that saving and investment are key for long-run growth and higher living standards.

So why is he doing this? I periodically run into people who are convinced that the President is deliberately trying to ruin the nation. I tell them this is nonsense and that there’s no reason to believe elaborate conspiracies.

President Obama is simply doing the same thing that President Bush did: Making bad decisions because of perceived short-run political advantage.

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Never let it be said I back down from a fight, even when it’s the other team’s game, played by the other team’s rules, and for the benefit of the wrong person.

And that definitely went through my mind when U.S. News & World Report asked me to contribute to their “Debate Club” on the topic of “Should Mitt Romney pay higher taxes?”

I’m not a Romney fan, and it irks me to defend good tax policy on behalf of someone who is incapable and/or unwilling to make the same principled arguments.

But my job is to do the right thing and bring truth to the economic heathens, so I agreed to participate. And I’m glad I did, because it gave me a chance to try out a new argument that I hope will educate more people about the perverse impact of double taxation.

Let me know what you think of this approach, which asks people whether they would think it would be fair if they couldn’t take credit for withheld taxes when filling out their 1040 tax return.

Capital gains taxes and dividend taxes are both forms of double taxation. That income already is hit by the 35 percent corporate income tax. So the real tax rate for people like Mitt Romney is closer to 45 percent. And if you add the death tax to the equation, the effective tax rate begins to approach 60 percent.  Here’s a simply analogy. Imagine you make $50,000 per year and your employer withholds $5,000 for personal income tax. How would you feel if the IRS then told you that your income was $45,000 and you had to pay full tax on that amount, and that you weren’t allowed to count the $5,000 withholding when you filled out your 1040 form? You would be outraged, correctly yelling and screaming that you should be allowed to count those withheld tax payments.  Welcome to the world of double taxation.

By the way, if you like my argument, feel free to vote for my entry, which you can do on this page.

I won my previous debate for U.S. News, so I’m hoping the keep a good thing going. As they say in Chicago, vote early and vote often.

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Whether I’m criticizing Warren Buffett’s innumeracy or explaining how to identify illegitimate loopholes, I frequently write about the perverse impact of double taxation.

By this, I mean the tendency of politicians to impose multiple layers of taxation on income that is saved and invested. Examples of this self-destructive practice include the death tax, the capital gains tax, and the second layer of tax of dividends.

Double taxation is particularly foolish since every economic theory – including socialism and Marxism – agrees that capital formation is necessary for long-run growth and higher living standards.

Yet even though this is a critically important issue, I’ve never been satisfied with the way I explain the topic. But perhaps this flowchart makes everything easier to understand (click it for better resolution).

There are a lot of boxes, so it’s not a simple flowchart, but the underlying message hopefully is very clear.

1. We earn income.

2. We then pay tax on that income.

3. We then either consume our after-tax income, or we save and invest it.

4. If we consume our after-tax income, the government largely leaves us alone.

5. If we save and invest our after-tax income, the government penalizes us with as many as four layers of taxation.

You don’t have to be a wild-eyed supply-side economist to conclude that this heavy bias against saving and investment is not a good idea for America’s long-run prosperity.

By the way, Hong Kong’s simple and fair flat tax eliminate all those extra layers of taxation.

That’s the benefit of real tax reform such as a flat tax. You get a low tax rate, but you also get rid of double taxation so that the IRS only gets one bit at the apple.

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