Saturday, July 18, 2015

Study: Tax Cuts for Dividends doesn't Help Economy

It's been reported that Wal-Mart heir Alice Walton rakes in over $1 million a day, just on her Wal-Mart stock dividends.

Excerpts from the Roosevelt Institute:

One of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent as part of his rapid and expansive tax cut agenda.

There’s been a lot of research about the effect of this massive dividend tax cut on payouts to shareholders (kicked off by an important 2005 Chetty-Saez paper), but very little on its effect on the real economy.

Until now...

UC Berkeley economist Danny Yagan’s new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut” uses a large amount of IRS data on corporate tax returns to compare S-corporations with C-corporations. (66-page pdf and slides).

C-corporations are publicly-traded firms, while S-corporations are closely held ones without institutional investors. Yagan looks at the ones largely comparable in the range between $1 million and $1 billion dollars in size, as they are competing in the same industries and locations.

Crucially, though, S-corporations don’t pay a dividend tax and thus didn’t benefit from the big 2003 dividend tax cut, while C-corporations do pay them and did benefit. So that allows Yagan to set up S-corporations as a control group and see what the effect of the massive dividend tax cut on C-corporations has been.

Yagan found no statistical difference between the two at all. There was no difference in either investment or adjusted net investment. There was also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy.

The one thing that does increase for C-corporations, of course, is the disgorgement of cash to shareholders. Cutting dividend taxes leads to an increase in dividends and share buybacks. [Investor Nick Hanauer says stock buybacks actually hurts the economy.]

This is evidence against the theory that firms use the stock market to raise funding ... Taxation of dividends does very little to impact the cost of capital for firms, because equity isn’t the binding constraint on marginal investment options.

[Editor's note: I took the liberty to also include this chart.]
Private investment: 1929 to 2015

Tax Rates on Long-term capital gains and Qualified Dividends for 2015

Per Charles Schwab: A top rate of 15% applies to qualified dividends and the sale of most appreciated assets [i.e. capital gains on stocks and SWAG investments] held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $413,200 ($464,850 for married filing jointly). Long-term capital gains or qualified dividend income over that threshold are now taxed at a rate of 20% *.

EXAMPLE: If a married couple already has $464,850 of taxable income and an additional $100,000 in long-term capital gains and qualified dividends, the entire $100,000 would be subject to the 20% rate. If, however, they only had $400,000 of taxable income and $100,000 in long-term capital gains and qualified dividends, then $64,850 of the additional amount would be taxed at 15% and $35,150 would be taxed at 20%.

* An additional 3.8% surtax applies to net investment income for taxpayers with adjusted gross income over $200,000 for single filers ($250,000 married filing jointly). The 3.8% surtax was added with Obamacare to expand Medicaid. So the very top rate would be 23.8% for billionaires, whose income is mostly from capital gains, and not regular wages. This tax rate is very low for the top 0.01% when compared to the top tax rate of 39.6% for regular wages. (See the last line in the chart below from Charles Schwab)

Related post from the Roosevelt Institute: Skyrocketing CEO Pay Is Bad for Our Economy

2015 tax rates


  1. I don't know about you Bud, but i've been waiting for 30+ years for the wealth to trickle down ... when i can buy my yacht...

    unfortunately i think they're stepping on my poor head

  2. New York Times:

    As America industrialized in the late 19th century, the economy became dominated by big corporations. The economic boom after World War II solidified the view that regular increases in fixed wages and benefits could carry the burden of “sharing the wealth.” Sadly, since the 1970s, wages have stagnated.

    The stagnation of earnings for most Americans, despite rising productivity, and the shrinkage of the middle class, because of soaring inequality, are without precedent in our economic history. Capital’s share of national income has risen, while labor’s share has fallen — even though it includes lavish compensation of executives who are paid disproportionately through stock grants, options and bonuses.

    We need to reform a little-known tax loophole, Section 162(m), of the Internal Revenue Code. In the early 1990s, in an attempt to reform executive pay, Congress changed that section to limit corporate income tax deductions to $1 million for the top five executive salaries, but allowed virtually unlimited deductions for a variety of top-executive performance-based pay, including equity and profit-sharing. Corporations, which have exploited this loophole to offer lavish compensation packages, should get these deductions only if they offer a profit-sharing or share-ownership plan to all employees.

    We favor only ownership policies that emphasize grants of stock (as in the case of employee stock-ownership plans), restricted stock (which has to be held on to for a certain period of time, incentivizing workers to stay) or stock options.