"What is the Double Taxation of Dividends"

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A lot of people who don't understand accounting and taxes get angry whenever they hear that someone in the government wants to eliminate the double taxation of stock dividends.

They are generally people who refuse to save up enough of their own money to buy stock outside of company retirement plans (and often don't have or don't contribute to those) and they're open to liberal, quasi-socialist, class warfare propaganda that says that's giving too much money away to those horrible rich people who already have too much money.

Yet, the truth is, that the double taxation of dividends is a way that the government is punishing the wealthy, so it can raise money to give away to those who want to remain poor.

Double Taxation of Corporate Profits is the Government Stealing Your Money

Let's start at the beginning.

You decide to buy 100 shares of The Wonderful Acme Company

There are 999 other owners who own 100 shares each. So that's a total of 1000 shareowners who all own 100 shares, or 1/1000 of the company each.

This year, The Wonderful Acme Company has net sales of its widgets of $1,000,000.

Let's also say that The Wonderful Acme Company has expenses (equipment, salaries, supplies and so on) of $800,000.

Therefore, most people understand that The Wonderful Acme Company has a net income for the year of $200,000.

Legally, Shareholders Own All of a Company's Pre-Tax Profits

Because you own your 100 shares and own 1/1000 of the company, your share of that is 1/1000 of the $200,000 . . . $200.

Great.

Of course, taxes must be paid. Corporate taxes go up and down and vary by country to country.

We'll just say that The Wonderful Acme Company must pay 40% of that $200,000 to the government. That's $80,000, leaving a total of $120,000 net profit after taxes.

All of a Company's Taxes Comes Out of Shareholder Money

That is, after the company pays its taxes.

Notice that -- the company just paid 40% of YOUR $200 ($80) to the government as required taxes.

You just paid taxes on money earned by YOUR company.

Now the Board of Directors of The Wonderful Acme Company meets to decide what to do with that remaining $120,000.

They vote to give shareholders such as yourself a payout of 50%.

That means they're going to distribute half of that $120,000 as dividends to you shareholders . . . a total of $60,000. The other $60,000 is called retained earnings.

The company uses that cash to begin operations for the next year.

Dividends are Then Paid to Shareholders

You get 1/1000 of the total $60,000 distributed to common stock owners, or $60.

Depending on how much you paid for your 100 shares, that may be good or bad, but that's not the point.

Here's the point -- the government now wants you personally to pay taxes on that $60.

As I right this, the amount would probably be 15%. It's been higher. But now the government would want you to pay 15% X $60 or $7.50 to it by April 15 of the next year.

Double Taxation of Corporate Profits Happens Because the Government Demands Taxes on the Same Profit From Both the Company and the Shareholder

But remember . . . you (in the form of 1/1000 of the company) already paid taxes on the true net earnings of the companies

That money was not in your pocket, true, but it was your money to the extent you own stock in the company.

Yet the government wants more of that money after it is put into your pocket.

Business Profits are Double Taxed

That's double taxation, because you pay taxes on the same money twice.

It may not seem real, because you don't know about the company's net earnings, only the dividend check seems real to you -- but the truth is, the government is being unfair to you.

And the liberals who use class warfare rhetoric (and make no mistake about it, many of them are in their hearts out and out socialists, although they're smart enough not to say so publicly) to stop the elimination of taxes on dividends are stealing money from you directly and hurting the overall economy by discouraging investment.

Class Warfare Politicians Prevent a Truly Rational Dividend Taxing Government Policy

President George W. Bush's Public Law 108-27, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was a step in the right direction, for the United States

It reduced the tax rate on most stock dividends to 15% for most people, and to 5% for taxpayers in the lowest tax bracket.

Unfortunately, it is set to expire, and U.S. voters have just turned their House of Representatives and Senate over to Democrats who use the class war rhetoric to appeal to ignorance. We'd have an even better economy if investors knew they could count on the dividend tax rate remaining at 15% (if not lower) through their retirement years.

NOTE in November 2010: voters have just changed the politics of the House of Representative and the Senate. However, although the new Congress will be very budget conscious, eliminating double taxation of dividends is not being mentioned. I'm sure President Obama would not sign such a bill even if it were passed.

We'll be lucky to see the Bush tax cuts continued past their December 31, 2010 deadline. That includes the reduced rate for dividend income. The lame duck Congress seems inclined to let them go up. Hopefully the next Congress will continue them retroactively.

Hopefully, in the future voters will elect a House of Representative, Senate and President who understand that this double taxation is theft and a disincentive to investors, thus reducing wealth creation in the United States for everybody.

Another factor preventing companies from paying dividends is their need to spend large amounts of profits on capital expenditures.

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