Another bad tax analogy

[mcrain]

Anyone who knows me will know that I disagree with this, but I figured I'd go ahead and post it.

If you don't understand the Democrats' version of tax cuts (and you are not alone), this will explain it for you:

50,000 people go to a baseball game, but the game was rained out and a refund was then due the attendees. The team was about to mail refunds when the Congressional Democrats stopped them and suggested sending refund amounts based on the Democrat National Committee's interpretation of fairness. After all, if the refunds were made based on the price each person paid for the tickets, most of the money would go to the wealthiest ticket holders and that would be unconscionable. The DNC plan lays down the following criterion:

A. People in the $10 seats will get back $15 because they have less money to spend. Call it an "Earned" Income Ticket Credit." Persons "earn" it by demonstrating little ambition, few skills and poor work habits, thus keeping them at entry-level wages.

B. People in the $25 seats will get back $25 because that's only fair.

C. People in the $50 seats will get back $1 because they already make a lot of money and don't need a refund. If they can afford a $50 ticket then they must not be paying enough taxes.

D. People in the $75 luxury seats will have to pay another $50 because they have way too much money to spend.

E. People driving by the stadium who couldn't afford to watch the game will get $10 each. Even though they didn't pay anything or attempt to go to the game, they get a refund because they need the most help.

Now do you understand? If not, contact Representative Richard Gephardt or Senator Tom Daschle for assistance and further explanation.

[Taft]

Originally posted by mcrain
Anyone who knows me will know that I disagree with this, but I figured I'd go ahead and post it.


So, from a tax professional (you), how would you amend this analogy to make it more true?

Taft

[wwworry]

hey, I went to see Gephardt speak and he sounded pretty good. He's worth a look.

[mcrain]

First, the analogy is bad to begin with. You don't buy anything with your taxes. Taxes are assessed based on income/value of property/value of whatever.

I think a better analogy would be 3 kindergarten kids with 5 different colored marbles.

Kid 1 - Total marbles 20. 8 green, 7 blue, and 5 red.
Kid 2 - Total marbles 50. 30 green, 10 blue, 5 red and 5 orange.
Kid 3 - Total marbles 350. 200 green, 50 blue, 25 red, 20 orange and 55 purple.

Now, the teacher asks each kid to give him 1/2 of their marbles. Kid 1 gives him all 5 of her red marbles and five of her blue marbles.

Kid 2 gives the teacher 13 of his green marbles, 5 of his blue marbles, 4 of his red marbles and 3 of his orange marbles.

Kid 3 gives the teacher 150 green marbles, 20 blue marbles and 5 red marbles.

The teacher then determines that he has too many green marbles. He only needs 142 green marbles, so he needs to reduce his number of green marbles by 21.

What is fair? Should he give kid 2 1 green marble, and the other 20 green marbles to kid 3 based on their contribution of green marbles? If so, kid 1 has still given 1/2 of her marbles to the teacher, while kid two has only given 48% of his marbles to the teacher, and kid 3 has only given 44.28% to the teacher.

What if the teacher decides to try to get the percentages even after the refund?

That would require a credit of 1 green to kid 1. Kid 2 gets 3 green marbles. Kid 3 would get back 18 green marbles (rounding in favor of kid 2), however, there are only 18 marbles to give him. This results in percentages of 45, 44 and 45.14% respectively.

However, Kid 1 didn't give any green marbles! If you only look at the green marbles, it's not fair to give her any green marbles... is it?

[alex_ant]

So would it be fair to say that the Republicans have lost their marbles?

[MrMacMan]

Originally posted by mcrain
Anyone who knows me will know that I disagree with this, but I figured I'd go ahead and post it.

If you don't understand the Democrats' version of tax cuts (and you are not alone), this will explain it for you:

50,000 people go to a baseball game, but the game was rained out and a refund was then due the attendees. The team was about to mail refunds when the Congressional Democrats stopped them and suggested sending refund amounts based on the Democrat National Committee's interpretation of fairness. After all, if the refunds were made based on the price each person paid for the tickets, most of the money would go to the wealthiest ticket holders and that would be unconscionable. The DNC plan lays down the following criterion:

A. People in the $10 seats will get back $15 because they have less money to spend. Call it an "Earned" Income Ticket Credit." Persons "earn" it by demonstrating little ambition, few skills and poor work habits, thus keeping them at entry-level wages.


Wait, wtf. Does that mean that all people who have low paying jobs have bad habits?
No. I have know people who are the oppisite.

Rich and lazy. Don't be that way man.

[Choppaface]

why can't the teacher just paint some of his green marbles other colors?

Originally posted by alex_ant
So would it be fair to say that the Republicans have lost their marbles?

i think they had them surgically implanted so that they'd have marbles when the go smoke out some terrerest butt :D :D

[RugoseCone]

I like to think of myself as being pretty open minded. Now most here would likely characterize me as being "conservative" or "Republican", but I'm neither. I weigh each issue differently and don't really subscribe to any platform.

Anyways, my wife and I are of modest income, we live in a 2 bedroom condo in the burbs of Chicago (couldn't afford a home if we wanted to), drive a nice car, and have managed to pay off an enormous amount of credit card debt in less than two years, thanks to diligence and sticking to a plan. Enough to purchase 14 23" cinema displays. At the old price.

Neither one of us understand what all the bellyaching is about tax cuts. Can someone here explain why it's unfair to get rid of the marriage penalty? Why dividends should be taxed twice? Why it's a "fairshare" to pay 80% of the taxes by the top 50% of earners? Why it's fair for 50% of the taxes to be paid by the top 10%? I just don't get it.

What about the recently repealed luxury tax on boats. Bad idea? Look around for how many people lost their jobs because of that tax and the tremendously negative effect that had on some state economies. It was so bad in MA even Ted Kennedy spoke out against the tax.

I really want to understand why so many people have such a problem with tax breaks. I want to know why everyone derides the rich? Don't like your lot in life? The man keeping you down? Change. Yeah I know easier said than done. And this notion that rich people are lazy? Please. The amount of people that are rich due to inheritance is sooooo small.

I'd say the owner of my company is doing pretty well. He drives an expensive Benz, lives in a well-to-do burb, and he works 100 hours a week. How is this lazy?

I'm not trying to be a wiseguy, I really don't get it. Why the ire with people wanting tax relief? I could use a little bit myself, but I don't wail and gnash my teeth that the rich aren't paying their share. Please, no flames, I really want to see your point of view.

[zarathustra]

thank God you yourself called it a bad analogy.

The baseball spiel:

If a game is rained out, everyone should get back what they paid, because there was no service rendered. if the gov't collected taxes, but did not spend a penny of it, nobody benefited from it, therefore it should be given back in the same ratio it was collected. But since the gov't ALWAYS spends the money, they are giving away money that hopefully will stimulate the economy, so there is more taxable business done and the overall economy is stimulated, people have jobs are happier, yada-yada-yada. They stipulate by investing trust in the people, they will collect down the road and everyone benefits. Much like parents pay for kids' education - so they have the earning potential to help them out when THEY are in need, plus to make their children's quality of life higher than their's was.

The marble spiel:

We DON'T have a flat tax. The teacher would collect 23% of the poorest kid's marbles, and upwards of 45% of the richest kid's marbles. What's the point of different color marbles? Money is money is money. You totally lost me on this explanation.

The funny thing is, I STILL don't know what the democratic (party) way of redistributing tax-refunds is.

Wait, I do understand how it goes:

The gov't takes too much money to support bureaucrats out the a$$, but still have a refund, take it and then decide to give other people's money away. They are very liberal and helpful with other people's money.

I am all for certain social programs to help people stand up, and/or be caught if they are in trouble. But if there is a chance to give back to the people money that was theirs, I am not going to lick my chops and lust after other people's income; that would make me greedy. If I get a refund on my taxes, that's fine, if I don't I know it has gone to fund programs that are beneficial to all concerned.

The demcratic way seems only beneficial to some concerned, but I guess we all see it differently.

[SPG]

How about where the money goes? That's what really pisses me off.
Corporate welfare.
Military budget.
Debt service.

I'm all for a tax cut for everyone, but I think that the money that does come in could be much better spent. A lot of the stuff that would make this a better country wouldn't cost much compared to a gold plated toilet seat or a stealth bomber. Oh but don't listen to me, I'm a liberal dreamer...

[wwworry]

Originally posted by RugoseCone
I'm not trying to be a wiseguy, I really don't get it. Why the ire with people wanting tax relief? I could use a little bit myself, but I don't wail and gnash my teeth that the rich aren't paying their share. Please, no flames, I really want to see your point of view.

I sence mcrain has seen the futility of these boards and is trying to enjoy himself more. The marbles analogy is sadly ridiculous.

But I answer you RugoseCone partly with a summery of one of mcrains old posts: you have to consider ALL taxes paid when you talk about fair. federal taxes, state and local taxes, property tax, social security taxes, sales tax, gas tax, etc.

If you do that, middle income earners pay a greater share of their total income in taxes than the super-rich. It's true!
Also, in the last 70 years, federal income tax rates for the super-rich are at a historic low. Income disparity is at it's highest since 1929.
Also, income growth for the super rich is much higher than for middle-income earners whose wages are stagnant lately. Tax policy probably plays some part in thes trends.

Your not going to get much money out of the poor or lower income set. They just don't have it. So either middle income earners are going to pay the bill or upper-income earners are going to pay it, right?

So, knowing that, you, as a modest income earner is paying a greater percentage of your income in taxes than the super-wealthy, what is your conclusion? Wouldn't you rather have a greater emphasis on middle-income tax cuts?

The current federal policies are having quite a negative effect on states and municipalities. When state schools raise tuition that's a tax. When public transportation fares go up, that's a tax. When local primary schools, police departments and fire departments are forced to cut services that's kind of like a tax too. Those are taxes that disportionatly effect middle-income earners.

Now we go into deficits and the national debt. We have seen how the tax burden is shifting onto middle-income earners. We can also add the interest payments on the bigger debt and the repayment of the debt. Your children might have to pay that off.

On to dividends (sorry to be so long winded)
(From a letter writer to the New Yorker, Aristides Vertes)

".. there are several ironies at work in President Bush's proposal to end the tax on dividends in the name of stimulating the economy. In the past, one argument in favor of the tax was that the tax itself could serve as an economic stimulas. The logic was that people who received dividends viewed them as ordinary income and spent them in ordinary ways; the tax, by inhibiting investors demands for these payouts, would allow companies to invest more of their funds in new equipment and enterprises - something they could do better than individuals. Thus everyone would benefit: the corporations from additional profits, the shareholders from the resulting rise in stock price, the treasury from the tax revenues, and the public from the impetus that all this would give to the world of business, including new jobs."

Imagine that.

Personally I think trickle up works better than trickle down. And I don't trust the man who gives himself a huge tax break "in our interest". Let's get some relief to the middle class.

[Backtothemac]

Here is how the current tax structure is BS.

Last year. My wife and I made 19,000.00. Hey, no cheap shots we were students ;)

We got back the 1200.00 that the feds took during the year, and then an additional 1600.00 in tax credits. We did nothing to deserve that money, nothing. Now, the 1200 back that is ok, but all we did to get the 1600 was have a kid. That is it, and you know what, you all contributed to pay that to me.

Now, this year. We made 36,000 because I graduated, and she stoped working. There was 1800 withheld this year. We are eligible this year for any credits. None. So, out of the 1800 that was withheld, we get back about 600 bucks. That is it.

Now, my mom and dad will pay about 50,000 in tax this year, and about 40% of that will go to social programs to people that do not deserve the money for any other reason than they have a low paying job, or they have children and a low paying job.

That's it. That is the American dream. Work hard, be successful, and be ready to be FORCED to participate in programs that may, or may not have any relevance in your future. That don't work, that do not truely help people, because people become addicted to the programs.

Last year we made 19,000. This year 36,000.

Net last year was $21,000. This year 27,000. so was all those hours that I worked worth it? Or should I be lazy, have more fun, and use the rest of you for a crutch?

There should be a flat tax of 10% on everyone. No sales tax, no state tax, no FICA, nothing, but federal income tax of 10%. The feds should then do everything that they need to do with that money. If they can't tough.

No deductions, no write offs, just 10% of every check is gone. Hell, you would not even have to file a return, because they would get 10% of everyones checks.

Corporations would pay 15%.

Sorry for the rant, but I am just pissed that after working harder than I ever have, and trying to do for my family, we get punished because of success. And people like myself the year before that did NOTHING to deserve it, get my money. BS!

[mcrain]

BTTM, you know I pretty much agree with you on this. I don't think your percentage would be sufficient, but maybe. Just so long as whatever percentage it ends up being is the ONLY tax collected. No sales taxes, no other income taxes, no property taxes, no booze taxes, no other taxes period.

As for the marble explanation, it's not sadly anything, it's actually very accurate.

The green marbles are federal income taxes. The other colors are other types of taxes. All three kids ended up paying about 1/2 of their income (marbles) in taxes, despite the fact that kid 1 didn't pay ANY federal income tax.

Granted, the far ends of the taxing system are skewed down (ultra poor pay less while the ultra rich pay less), but for the most part, the overall taxation burden is flat across the various income levels.

Oh, the next person to say that the ordinary tax on dividends is a second tax gets the official "You're an idiot" award.

Ok, here's how it works. If I make $100, I'm taxed, and I take home say $75. I then invest that $75 in company x. Company x's stock appreciates in value to $100. Meanwhile, the company issues a $10 dividend. You still have your $75 which has already been taxed. You then receive a BRAND NEW $10 you never had before. You are taxed on that $10 at ordinary income rates. (One tax, not two!). Then, if you sell your stock, you realize a $25 gain. That's another BRAND NEW $25 you didn't have before! That gain is taxed either as short term or long term capital gain. (Again, one tax not two!)

[3rdpath]

if i don't like baseball, do i have to pay taxes?

[macktheknife]

Originally posted by RugoseCone
Neither one of us understand what all the bellyaching is about tax cuts. Can someone here explain why it's unfair to get rid of the marriage penalty? Why dividends should be taxed twice? Why it's a "fairshare" to pay 80% of the taxes by the top 50% of earners? Why it's fair for 50% of the taxes to be paid by the top 10%? I just don't get it.

What about the recently repealed luxury tax on boats. Bad idea? Look around for how many people lost their jobs because of that tax and the tremendously negative effect that had on some state economies. It was so bad in MA even Ted Kennedy spoke out against the tax.

I really want to understand why so many people have such a problem with tax breaks. I want to know why everyone derides the rich? Don't like your lot in life? The man keeping you down? Change. Yeah I know easier said than done. And this notion that rich people are lazy? Please. The amount of people that are rich due to inheritance is sooooo small.

I'm not trying to be a wiseguy, I really don't get it. Why the ire with people wanting tax relief? I could use a little bit myself, but I don't wail and gnash my teeth that the rich aren't paying their share. Please, no flames, I really want to see your point of view.

You are correct--dividends should not be taxed twice. I am always for cutting more taxes, given the enormous amount of waste federal, state, and local governments generate. The thing that bothers me about the dividend tax cut, however, is that it will disporportionately benefit those in the upper income bracket. From a macroeconomic standpoint, it would be better to target tax cuts at the corporate level. To generate jobs, cut taxes on capital spending for machines, factories, etc.--things that improve productivity and promote efficiency. Unfortunately, Bush's tax plan will cut the inheritance and dividends tax but not taxes at the corporate level.

[mcrain]

Originally posted by macktheknife
You are correct--dividends should not be taxed twice. and dividends tax but not taxes at the corporate level.

macktheknife <------ winner of the official "You're an idiot award!"

[macktheknife]

Originally posted by mcrain


macktheknife <------ winner of the official "You're an idiot award!"

I said that I agreed that dividends should not be taxed twice, but I also said that if there are going to be any tax cuts, there are better taxes to cut. I hope I made myself more clear.

[mcrain]

Originally posted by macktheknife
I said that I agreed that dividends should not be taxed twice, but I also said that if there are going to be any tax cuts, there are better taxes to cut. I hope I made myself more clear.

THEY AREN'T TAXED TWICE IN THE FIRST PLACE!

I do agree with you that there are far better taxes to cut.

[macktheknife]

Originally posted by mcrain


THEY AREN'T TAXED TWICE IN THE FIRST PLACE!

I do agree with you that there are far better taxes to cut.

Dividends are taxed twice--once at the corporate level (in the form of corporate income tax) and another at the individual level once the dividends are distributed. A similar analogy would be your parents getting taxed on the money they make and you getting taxed when they give you some of their money in the form of an allowance.

Yes, there are better ways to cut taxes, especially if Bush is selling is tax cut plan as a stimulus package. The president’s proposal to eliminate the double taxation of corporate income occurs through eliminating the personal taxation of dividends. My point is that a more potent way to eliminate the double taxation would be to do so at the corporate level. The impact on investment, and therefore employment, would be more direct, affecting a broader segment of Americans more quickly.

Much of the stimulus of the Bush plan will kick in sometime in 2004 rather than 2003 when we really need it. Not only that, much of the stimulus comes in the form of permanent tax cuts. Tax cuts are fine, but they are dangerous if we don't cut the size of government. History has shown us that cutting taxes do not result in smaller government due to the political fallout of laying off government workers. Spending goes on in the face of reduced tax rates, and the result is a chronic, structural deficit. Thus, what we need therefore are tax cuts to promote economic growth and budget cuts to avoid budget deficits that lead to "crowding out" effect on borrowing.

[mcrain]

Originally posted by macktheknife
Dividends are taxed twice--once at the corporate level (in the form of corporate income tax) and another at the individual level once the dividends are distributed. A similar analogy would be your parents getting taxed on the money they make and you getting taxed when they give you some of their money in the form of an allowance.

So, by that logic, there should be no taxes. Taxes are assessed on the TRANSFER of money. There are exceptions and deductions, but for the most part, the action of transferring money triggers a tax.

So, a customer buys a product. There is a tax on that transfer (both sales and corporate level income tax). Now, the corporation, transfers money to its shareholders. That transfer is taxed as a dividend. The shareholder hires a personal trainer. That payment is taxed as income. Then the personal trainer buys fruit. That transaction is taxed. The fruit dealer pays his suppliers. That is taxed. The supplier company issues a dividend. That is taxed. The divident happens to go to the first customer in this example. EVERY DOLLAR IS TAXED, TAXED AGAIN, AND THEN TAXED SOME MORE.

You have to look consider the tax on the transaction, not the dollar. Otherwise, all taxes have to be eliminated (by your logic).

Oh, there are exceptions for gift transactions less than $10,000 from an individual to another individual (20k can be given as a gift from a couple). So, your allowance is a "taxable transaction" but is covered by an exception.

However, if you're "allowance" is actually in the form of a "salary" arguably, that becomes a taxable transaction, however, the IRS doesn't push that unless the salary is being paid by an entity rather than a family member.

You're still the first winner of the first ever "You're an idiot award!". Care to try again?

[macktheknife]

Originally posted by mcrain


So, by that logic, there should be no taxes. Taxes are assessed on the TRANSFER of money. There are exceptions and deductions, but for the most part, the action of transferring money triggers a tax.

So, a customer buys a product. There is a tax on that transfer (both sales and corporate level income tax). Now, the corporation, transfers money to its shareholders. That transfer is taxed as a dividend. The shareholder hires a personal trainer. That payment is taxed as income. Then the personal trainer buys fruit. That transaction is taxed. The fruit dealer pays his suppliers. That is taxed. The supplier company issues a dividend. That is taxed. The divident happens to go to the first customer in this example. EVERY DOLLAR IS TAXED, TAXED AGAIN, AND THEN TAXED SOME MORE.

You have to look consider the tax on the transaction, not the dollar. Otherwise, all taxes have to be eliminated (by your logic).

Oh, there are exceptions for gift transactions less than $10,000 from an individual to another individual (20k can be given as a gift from a couple). So, your allowance is a "taxable transaction" but is covered by an exception.

However, if you're "allowance" is actually in the form of a "salary" arguably, that becomes a taxable transaction, however, the IRS doesn't push that unless the salary is being paid by an entity rather than a family member.

You're still the first winner of the first ever "You're an idiot award!". Care to try again?

The owner of a corporation are shareholders, and shareholders pay taxes indirectly through the corporate income tax. If the corporation distributes the income in the form of the dividend, that distribution is taxed again at the individual level. Your analogy concerning sales tax refers to consumption. There is a fundamental difference.

We can debate whether the government is too big, whether the Bush plan sucks, etc., but what is not debateable is that dividends under the current U.S. tax structure are indeed taxed twice. It is not simply "my logic." Ask any economist "Given the current U.S. tax structure, are dividends taxed twice?" or consult any finance textbook and you will find the answer to be "yes." I work as an economics consultant and researcher, so I am completely floored that we are even debating this issue. It's about as debatable as the question "Is the Earth round?"

Also, why do you have to resort to name-calling? I replied to a posting by another member, detailing why I agree that less taxes is good but that the Bush plan has flaws. I exercised restraint in avoiding name-calling to have an intelligent debate and avoid escalating mindless heated rhetoric. If you start calling someone an "idiot" just because their view differs from yours, I would hate to see what happens if they stepped on your foot. :rolleyes:

[jelloshotsrule]

Originally posted by 3rdpath
if i don't like baseball, do i have to pay taxes?

i hear that. baseball is terrible.

let's all go to an arena football game..... ha!

[Taft]

Originally posted by macktheknife


The owner of a corporation are shareholders, and shareholders pay taxes indirectly through the corporate income tax. If the corporation distributes the income in the form of the dividend, that distribution is taxed again at the individual level. Your analogy concerning sales tax refers to consumption. There is a fundamental difference.

So by that logic, the capital gains taxes should be repealed. If you by a stock at $50 and the stock rises to $60 as a result of increased corporate income and performance, you make ten bucks. The original income of the company was taxed and then your 10 bucks is taxed again.

The thing is the corporation and its shareholders are two seperate entities. A corporation is much different than a personal business, partnership or LLC in those regards (as well as many others). You give up some rights in regards for some protections and benefits under LLC's and corporations. So the corporation's income IS NOT your income as a shareholder. The corporation has the discretion of paying or not paying the divvidend to you.


Also, why do you have to resort to name-calling? I replied to a posting by another member, detailing why I agree that less taxes is good but that the Bush plan has flaws. I exercised restraint in avoiding name-calling to have an intelligent debate and avoid escalating mindless heated rhetoric. If you start calling someone an "idiot" just because their view differs from yours, I would hate to see what happens if they stepped on your foot. :rolleyes:

He said that the next person who called the dividend tax a case of double taxation would win the "You are an idiot award!" He was just living up to his promise.

Taft

[macktheknife]

From the Nolo Law Encyclopedia (http://www.nolo.com/lawcenter/ency/article.cfm/objectID/D557CF7D-3BAE-4550-93F37C97C455A2D4):


Tax on Dividends

If a corporation distributes dividends to the owners (rare for small corporations where the owners work for the corporation), the owners must report and pay personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are not tax-deductible, the corporation must also pay taxes on them. This means that dividends are taxed twice -- once to the corporation and again to the shareholders.


From the magazine Smart Money (http://biz.yahoo.com/smart/030110/20030110taxmatt_8.html):


Corporate dividends are generally subject to double taxation. First, the company pays corporate income tax on its earnings. Then, when the company pays out what's left as dividends, the shareholders get taxed again. So the same earnings get taxed twice: once at the corporate level and again at the shareholder level.

[mcrain]

Every dollar that is "earned" is taxed at every level it is "earned." EVEN money that is given out as salary by a corporation is taxed at the corporate level, the difference is that corporations are given a deduction at the corporate level for money it spends in the form of salary.

The fact of the matter is the money that makes up dividends is taxed once when it is EARNED by the corporation (which is a separate entity) and again as it is EARNED by whoever receives the money next. So, yes, you can say it is taxed twice all you want, but the reality of the situation, is that it is ONLY taxed ONCE for EACH time the money is EARNED!

How can you as an economic consultant not understand the fundamental rules of taxation or separate entities?

Look, I didn't mean to insult you by "name calling," but I had very clearly stated that the next person who regurgitated the divideds are a double tax garbage would win the award. I have on a dozen occassions explained how taxes work, and have on several occassions explained that the garbage that politicians spew out regarding dividend taxes is in reality garbage.

By the way, the earth IS round and dividend taxes are the one and only tax on the income received by the shareholder.

You're an economic consultant, I'm an attorney who specializes in corporate representation and taxation. Oh, I happen to work for a state level governmental entity that does taxes. I'd be happy to debate this issue with you.

[mcrain]

YOU SAID...

From the Nolo Law Encyclopedia:


quote:
--------------------------------------------------------------------------------

Tax on Dividends

If a corporation distributes dividends to the owners (rare for small corporations where the owners work for the corporation), the owners must report and pay personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are not tax-deductible, the corporation must also pay taxes on them. This means that dividends are taxed twice -- once to the corporation and again to the shareholders.
__________________________________________________

Do you want to know why it is rare for a small corporation to distribute dividends?

When any attorney worth more than $5 per hour sets up a small business corporation (instead of the preferable s-corp or LLC), they always, yes ALWAYS, advise their small corporations to hire an accountant to make sure that they "spend" all of the companies income in the form of either capital improvements or salaries. WHY you ask? Because those are deductible, and it eliminates a tax at the corporate level!!!!

Now, the big mega public corporations offer dividends despite the fact that they KNOW for a fact that that is a distribution of money that they can not deduct, and that their shareholders have to pay ordinary income taxes on. Why do they do that instead of purchasing capital assets or giving even more money to their employees? Because their shareholders demand that form of distribution. The shareholders prefer an income taxed at ordinary income rates rather than capital asset purchases that may or may not increase the stock value. WHY? Because many shareholders are retired and purchase stocks that offer dividends so they have a stream of income to live off of.

You really should know that as an economic advisor.

[macktheknife]

Originally posted by mcrain
Do you want to know why it is rare for a small corporation to distribute dividends?

When any attorney worth more than $5 per hour sets up a small business corporation (instead of the preferable s-corp or LLC), they always, yes ALWAYS, advise their small corporations to hire an accountant to make sure that they "spend" all of the companies income in the form of either capital improvements or salaries. WHY you ask? Because those are deductible, and it eliminates a tax at the corporate level!!!!

Now, the big mega public corporations offer dividends despite the fact that they KNOW for a fact that that is a distribution of money that they can not deduct, and that their shareholders have to pay ordinary income taxes on. Why do they do that instead of purchasing capital assets or giving even more money to their employees? Because their shareholders demand that form of distribution. The shareholders prefer an income taxed at ordinary income rates rather than capital asset purchases that may or may not increase the stock value. WHY? Because many shareholders are retired and purchase stocks that offer dividends so they have a stream of income to live off of.

You really should know that as an economic advisor.

Separate legal entities is not the foundation of the double taxation of dividend view--the ownership of the income generated is. The dividends you receive from a stock is reported as income, even though the corporation is merely distributing the after-tax income that belongs to shareholders. To reply to another post, capital gains is not taxed twice per se. The appreciation of a stock rests on factors not necessarily related to the profit the company generates (although in the long-term, there is almost a 100% correlation between stock price and economic value created). Other than dividends, no tax is collected from the time you purchase a stock to right before you sell it. The gains are taxed at a rate separate from income. No double taxation.

If you believe that dividends are not taxed twice, don't keep hammering away on these bulletin boards: write to Nolo and the authors of finance and economic textbooks to disabuse them of what you think is a misconception.

And about your point that dividend distribution is a function of shareholder and managerial preferences: yes, you are correct, but what are you arguing about now? This does not have anything to do with double taxation of income. Companies will pay a dividend depending on whether it has profitable business opportunities that could be exploited with retained earnings. Most firms in mature industries that generate excess cash but face limited growth opportunities will undoubtably return the cash to shareholders in the form of a dividend or a stock buyback.

Whether the shareholder wants a dividend depends on his tax situation and risk preference. If he wants stability of income he will hold on to the stock. If he has no need of income and does not want the dividends taxed at a higher rate than capital gains (assuming the investor is in a high income tax bracket), he can dump the stock and buy another one that fits his preferences.

Anyhow, I had entered the thread to voice my agreement with another poster who felt that less taxes was good. I replied why I thought that less taxes were better but also why I think there are better taxes to cut than the dividend tax if the goal is to generate economic growth. I'm not going to challenge your ideas--you are an attorney so I'm sure you know your stuff. All I ask is for more civility in these discussions.

Have a nice day. :)

[mcrain]

Originally posted by macktheknife
Separate legal entities is not the foundation of the double taxation of dividend view--the ownership of the income generated is. The dividends you receive from a stock is reported as income, even though the corporation is merely distributing the after-tax income that belongs to shareholders. To reply to another post, capital gains is not taxed twice per se.

So, we agree? The ownership of the income is the key you say? I agree. The corporation owns the income it receives, and because it IS a separate entity, it pays taxes on its income. (There are entity forms that allow flow through of income, however, that's not relevant to this discussion).

Now, until the shareholder receives income in the form of a dividend, the shareholder has no income to tax or declare, right? So, once the shareholder does receive income, a separate transaction has occurred, and is taxed. For the first time!

As for civility, I wasn't trying to be mean to you, but you didn't read the earlier posts I suppose, and just were open to the "you're an idiot" award. More to the point, I haven't been mean to you, but I am holding your feet to the fire on an assertion that dividends are taxed twice.

As for Nolo and the other economist types, why on earth do you think they argue the Republican spin that dividends are double taxed? BECAUSE THEY WANT DIVIDEND TAXES TO GO AWAY! It's the same reason they argue that middle income people are subject to the estate tax. Both are wrong, both are outright misstatements, but both get votes because they scare people.

So, you have a nice day too. :)