The Biden government has released a spate of tax proposals, including a headline-grabbing capital gains tax hike that would apply retrospectively from April. Dividends would be under the same treatment, according to a recently released Treasury Department document.
For taxpayers with adjusted gross income greater than $ 1 million, the proposal would tax qualified dividends – dividends from shares in domestic corporations and certain foreign corporations held for at least a certain minimum period of time – at income tax rates (currently higher) to 40, 8%) rather than the lower capital gains rates (23.8%). At first glance, it’s easy to get distracted by the $ 1 million figure and assume that only rich people will be affected, so who cares? But the damage goes beyond that.
The studies available to us indicate a negative relationship between dividend taxes and dividend payments. A 2005 paper by Economists Raj Chetty and Emmanuel Saez Examined the Impact of 2003 Dividend Tax Reductions on Dividend Payments in the United States The authors “find a sharp and widespread increase in dividend payouts after the tax cut” after a steady decline in payouts over two decades. They found that these payments were not a one-time increase but were regular and recurring payments. Companies that were already paying dividends also increased the amount they paid after the tax cut. That means shareholders of all income levels got more dividends.
Princeton’s Adrien Matray and co-author Charles Boissel looked at the subject the other way around. In a 2019 study, they found that an increase in French dividend taxes resulted in lower dividend payments. With a dividend tax hike, companies would rather keep the money and use it for investment than give it back to shareholders. Another study from 2011, looking at America’s largest competitor, came to the same landmark conclusion: A lower dividend tax rate in China in 2005 resulted in an increase in dividend payments.
Thus, the effects of a dividend tax hike would not be limited to millionaires. Internal Revenue Service data shows that around 27 million taxpayers receive qualified dividends in 2018, and more than half had adjusted gross income less than $ 100,000. Another 27% had an adjusted gross income between $ 100,000 and $ 200,000.