This is rather annoying, seeing the New York Times advancing arguments that are quite so at odds with reality. For they've entirely missed the point that the US, almost uniquely among advanced nations, double taxes income from capital investment. Therefore we cannot look just at the tax rates supposedly paid by investors and conclude that that is the total tax rate. Instead, we should look at the taxation of profits before any distributions are made, add that to the rate paid by investors themselves and then calculate the total tax rate on capital investment. And the answer is then that investment income is taxed at higher rates than labour income, in direct contrast to the argument being put forward.
Before we run through that point again this is simply bad logic:
I.R.S. figures show that in most years since dividend tax rates were reduced, the superrich have reported that about half of their income came from tax-advantaged investments. For the very rich the proportion in 2011 was less than 17 percent. That is no doubt a chief reason for the substantial difference in tax rates for the two groups.
Of course, ordinary Americans also are eligible for preferential tax rates on dividends and capital gains, and for most of us they remain at 15 percent. The catch is that few of us have a lot of investments in taxable accounts and therefore derive little benefit from those breaks. In 2011, the average taxpayer earning less than $500,000 received just 2 percent of his or her income from dividends and long-term capital gains. Most of that money went to people earning more than $100,000.
So most of us face no tax bill at all on our capital income and yet the richer people who are actually paying tax on their capital income, it's those rich people who are tax advantaged? I dunno, maybe, it's said that it's an infinite universe so there could be somewhere or sometime in which a 0% tax rate is a higher rate than 17%, I'm just not sure that it's reachable from here without the use of powerful psychedelics.
But that's not the worst of it, the failure to account for double taxation is.
In 2003, in one of the great steps to help wealthy investors, the Bush administration and Congress lowered the tax on dividends to match the capital gains rate, 15 percent. The effective rate paid by the superrich dropped to the low 20s from the mid-20s.
This simply isn't true.
In theory there are two ways that you can tax profits and or dividends which are the distribution of said profits. We could say that's a profit, here's the profit tax rate and then once that is paid then whether the cash is distributed as a dividend or reinvested makes no difference, the tax has already been paid. Alternatively, we could not tax profits at all but instead tax the amount of that profit that investors receive. That is, tax the dividends. Almost all countries use one or other of these systems. My native UK combines them in a sensible manner. The profits are taxed at the company level and then dividends are taxed again only if the recipient is a higher rate tax payer. For something akin to the basic rate of income tax has already been paid on those dividends in the form of corporation tax.
America is the odd man out here. Full corporate income tax is applied to dividends before they are distributed. Then further tax is applied to them once they reach the wallets of the recipients. It is this which is double taxation: and the justification of the special lower, 15%, rate on dividends is that the special rate acknowledges that double taxation.
To get the full rate that is actually taken from those dividends we have to add those two taxes together. The 35% corporate income tax plus the income tax charged, what is called the integrated tax rate:
The personal dividend income tax is the second tax on corporate profits and contributes to the double taxation of corporate income. Suppose a corporation earns a profit of $100. It then needs to pay the corporate income tax rate of 39.1 percent ($39.10 corporate tax bill). Its after-tax profit is $60.90. The corporation then distributes these after-tax profits as dividends to its stockholders. The stockholders then need to pay the 28.6 percent personal dividends tax rate on the dividends ($17.41 dividend tax bill). In total, the tax burden on the corporate profits is $56.52, for an integrated tax rate of 56.5 percent. The United States’ two layers of corporate taxation places a heavy burden on corporate investment, especially considering the United States also has the highest statutory corporate income tax rate in the OECD.
And I'm afraid that saying that the company is paying one part of this tax, the shareholders another just doesn't work. Companies cannot and do not pay tax: all taxes reduce the income of one or another live human being.
And I think we'd be in a rather better world if the would be newspaper of record actually bothered to tell us all the truth about such things rather than making such obviously incorrect arguments.
