What is happening with tax policy in Washington now?
The Trump administration and Congress have made reform of the tax code a priority. Among the various provisions being considered to simplify the tax code and spur job creation and economic growth, policymakers are debating the appropriate level of corporate taxation and taxation of capital gains and dividends. The ASI coalition argues that reducing taxes on corporate and investment income will promote economic growth, make U.S. companies more competitive internationally, and spur further job creation.
What would higher taxes on investment income do to the economy?
Higher taxes on capital gains and dividends discourage Americans from saving and investing. A tax penalty for investing in American corporations would drive investment dollars away, depriving businesses of the capital they need to grow thus stifling our nation’s economic recovery.
- Slow economic growth: There is substantial evidence that tax increases, particularly tax increases on investment activity, have a negative effect on ecomomic growth. While the economy is stronger today than it was a decade ago, there’s no question that the last decade has been marked by a slow recovery and sluggish GDP growth. Higher taxes on capital will only add to the challenges the U.S. economy continues to face.
- Fewer companies would pay dividends: Higher tax rates for dividends provide a disincentive for corporations to distribute profits to shareholders, while lower rates encourage more companies to pay out.
- Companies would pay out smaller dividends: A study by the Cato Institute found that 19 companies in the S&P 500 began paying dividends for the first time in the immediate aftermath of the tax reform enacted by Congress in 2003. And annual dividends paid by S&P 500 companies rose from $146 billion to $172 billion.
How would lowering taxes on investment income affect seniors?
- Seniors earn a disproportionate amount of the dividend income: A January 2010 study by Ernst & Young found that of the 27.1 million Americans who received a dividend from utility companies in 2007, 61% were from taxpayers age 50 and older and 30% were from taxpayers age 65 and older.
- Seniors rely on dividends to make ends meet: Millions of older Americans rely heavily on income from investments to supplement their fixed retirement benefits. According to the Investment Company Institute, more than half of older investors cite current income as their principal reason for investing. Many of these retirees earned these investments through years of hard work, opting to receive company stock as part of their compensation. They took pride in their work and wanted to own a piece of the company they worked for. These investments often form the bedrock of their life savings.
- Weaken Retirement Accounts: Studies have found that raising taxes on investment income could depresses the value of stocks held in various retirement savings plans, doubling the damage done to seniors. By contrast, reducing taxes on investment income will help their retirement dollars go further.
How would lowering taxes on investment income affect corporate behavior?
- Less Management/Shareholder Alignment: Dividends are an important tool to align the interests of management and shareholders.
- Less Transparency: Dividends serve an important corporate governance function, since companies must have cash from real profits in order to pay dividends to shareholders. As such, dividend payments are the ultimate form of accounting transparency.
- More Debt Financing: High tax rates on dividends can reduce the perceived value of a company’s stock and encourage it to raise capital through debt, since interest on debt is a deductible corporate expense for tax purposes and dividends are not.