President's Dividends Plan Undertaxes High-Income Taxpayers

Abstract

The president's plan to exclude 100 percent of dividends from taxation is based on the false premise that taxpayers generally are overtaxed on corporate earnings. Thompson's analysis shows that on average, taxpayers in the highest bracket, 35 percent after implementation of the rate cuts, are currently paying an approximate 35.5 percent effective rate of tax on distributed and undistributed corporate earnings. On the other hand, taxpayers in the 28 percent bracket are, on average, currently subject to an approximate 33.54 percent effective rate. This means that there is a case for dividend relief for taxpayers in the 28 percent and lower brackets, but not for taxpayers in the 35 percent bracket. The president's plan would reduce the effective rate of tax on corporate earnings to no more than 25.68 percent, meaning that on average, 35 percent bracket taxpayers would be under taxed on dividends by 9.32 percentage points. Congress needs to focus dividend relief on taxpayers in the tax brackets where dividends are being over taxed and reject the president's plan for a 100 percent across-the-board exemption.