Middle-class savers haven't fared well under the federal stimulus efforts. These are the responsible people who worked hard, lived within their means, saved money, and did not participate in all the greed and games that led to the financial crisis. They are the people who did what the experts say and put half their savings into stocks that have barely broken even over the last decade, and half into safe investments in CDs. Those CDs paid 5% back in 2008, but now pay barely 1% as food and gas prices soar. Shouldn't we seek a simple policy change that would compensate those savers at the same time that it provides real, permanent, free-market stimulus to our economy without boosting debt?
There is a simple tax trick that does it. Today, corporations pay a 35% tax on what they earn. So, if a company you own stock in earned $100 it will only have $65 left after tax to pay to you. Effectively, you paid that 35% tax on your share of its earnings. Bill Gates pays that same 35. Now, under our progressive system Bill Gates is supposed to pay tax at a much higher rate than a working saver. You would expect to see that play out when those dividends are paid or the stock is sold, and tax is paid at the individual level. Congress, however, wanted to reduce the double (corporate and individual level) tax. Rather than do it at the corporate level where everyone pays the same rate, they did it at the individual level, so that Bill gates only pays tax at 15% on the $65 left after corporate tax. That works out to a total tax of 44.75% on those corporate earnings, compared to the working saver's 35%. What if, instead, we allowed corporations to take a deduction for the dividends they pay and taxed shareholders at ordinary rates -- but keeping the benefits for IRAs and such -- to make up for the revenue loss? Further, what if we taxed people earning over $500,000 a year at the 44.75% level on all their income that Bill Gates is supposed to pay on his corporate income today? Now your company could pay out a full $100, meaning that you would get 53% more than you got before. You would still be protected against tax in your IRA, so your current tax would drop to zero. With some technical tweaks we can do this without adding a dime to the deficit. I know it doesn't sound like that should work, but the IRS and Federal Reserve data say it does. Today income is so concentrated at the top and wealthy individuals pay so little tax that we can afford to give middle-class savers a big break without doing anything radical to the folks at the top of the food chain. You can check www.sharedeconomicgrowth.org for the details.
This would leave regular folks saving for retirement or their children's educations much better off, shifting the burden to well-heeled speculators, i.e. the folks who brought you the financial crisis. At the same time it would do other great things for our economy. Today, the most highly-taxed place you can put a factory is in America (Japan was, but they are lowering their rate). With a dividends-paid deduction, corporations would see America as the lowest tax place to put that factory. We would be collecting the same tax in a smarter, easier way that would also make corporate tax shelters pointless.
That last advantage is precisely why politicians won't even mention the possibility of a dividends-paid deduction. They get a lot of money from corporations, and will get even more now that the Supreme Court has ruled that such contributions can't be limited. A dividends-paid deduction would make tax loopholes and Congressional giveaways useless, drying up the money trough. If you want this, you'll need to demand it.
Matt Lykken is a tax attorney and director of SharedEconomicGrowth.org