Today, Congressman Christopher Cox (R-CA) introduced a bill to repeal the double taxation of dividends titled, “The Investor Protection, Market Stabilization, and Tax Fairness Restoration Act.” In a letter to his former House colleagues, Empower America co-director Jack Kemp strongly supported the Cox bill and urged Congress and the administration to embrace even broader legislation to encourage capital formation, productivity, and employment while simultaneously moving the tax system toward fundamental tax reform.
Kemp stated, “If the Cox bill were bundled with other pro-growth tax proposals, such as increasing the offset of net capital losses against other income, cutting the capital gains tax rate, extending contribution or income limits on IRAs, making the 30% ‘bonus depreciation’ permanent, reducing the corporate income tax rate and accelerating the individual income tax rates reductions we will have taken a giant leap toward getting this economy going again and a significant step down the road of fundamental tax reform.”
The confiscatory double tax on dividends introduces a tax bias against equity financing, and encourages companies to become more highly leveraged. Under current law dividends are taxed once at the corporate rate and again at the full individual rate, and have an effective rate greater than 60%. If the company retains earnings it is taxed at the capital gains rate when the stocks are sold which is often referred to as the “double taxation of retained earnings.” And, if the company opts for debt financing the tax liability passes through to the bondholders. Thus, by following the money to and from a corporation it becomes evident that even though some forms of financial arrangements receive less detrimental treatment than others, our current system of corporate taxation leads to double, triple, and quadruple taxation of returns on saving.
In addition to providing much needed tax relief, ending the double taxation of dividends will help the economy as a whole. According to a 1992 study by the Treasury Department, ending the double tax on dividends could increase the capital stock by up to $500 billion, and produce an annual gain to the U.S. economy of up to $25 billion.