The study found that the average combined federal and state top marginal tax rates on dividends paid to individuals in the United States is 28.6 percent--the ninth highest in the 34-nation Organisation for Economic Co-operation and Development (OECD).
And taxpayers in five states face combined top marginal rates far higher than the OECD average. In fact, only five OECD countries had a higher top marginal tax rate on individual dividend income than California, Hawaii, New York, Oregon and Minnesota.
The Tax Foundation argues that reducing the dividend tax burden will lead to faster economic growth, higher wages, and better living standards.
The ten U.S. states with the highest combined federal, state, and local top marginal tax rates on personal dividend income are: California, 33.0 percent; Hawaii, 31.6 percent; New York, 31.5 percent; Oregon, 31.0 percent; Minnesota, 30.9 percent; D.C., 30.4 percent; Vermont, 30.4 percent; New Jersey, 30.4 percent; Maryland, 30.3 percent; and Maine, 29.8 percent.
The ten states at the lowest end of the scale are: Washington, 25.0 percent; Nevada, 25.0 percent; Alaska, 25.0 percent; Texas, 25.0 percent; South Dakota, 25.0 percent; Florida, 25.0 percent; Wyoming, 25.0 percent; North Dakota, 26.3 percent; Pennsylvania, 26.8 percent; and Alabama, 27.4 percent.
The report noted that most states tax personal dividend income as ordinary income, which means that states with high income tax rates also have the highest taxes on personal dividends.
Dividends are payments made by a corporation to an individual who owns that corporation’s stock. Corporations distribute these dividends to investors from their after-tax profits. Once shareholders receive this dividend income, they must pay personal income taxes on it, making the personal dividend tax a double tax on corporate profit.
The Tax Foundation offers the following example of why the dividend taxes are so burdensome:
“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 (average) 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.”
The Tax Foundation says the dividend tax burden influences corporate behavior: Because dividend income generally has been taxed at higher rates than capital gains, corporations have had an incentive to retain their earnings, increasing investors’ capital gains rather than distributing profits through dividends.
“As a result, the number of firms that distributed their profits through dividends consistently declined between 1984 and 2002. However, in 2003, dividend tax rates were lowered to 15 percent, and the tax bias between capital gains and dividends was nearly eliminated. Following this change, the number of firms offering dividends drastically increased the next year.”
The study concludes that reducing the tax burden on personal dividends “will lead to faster economic growth, higher wages, and better living standards for all.”