How much tax is paid on dividends?
November 20, 2017; updated December 10
I have this brilliant idea about corporate taxes, and that is they should be eliminated altogether. To offset the lost revenue, all dividends and long-term capital gains would be taxed as ordinary income. Currently, the top rate on dividends and long-term capital gains is 20% plus a 3.8% Medicare tax, bringing the total to 23.8%. The top rate on ordinary income is 39.6%.
This is been suggested by others, but my plan differs because corporations would be required to immediately distribute all profits to shareholders. There would be no such thing as "retained earnings." And taxes would be withheld from those dividends, just as with wages. Details are in my April 16, 2015 story. In that story, I claimed that my plan would increase federal revenues by $139.3 billion a year, and I provided figures to support my contention. But I'm an amateur, so I worry that I am missing something.
Figures are available on total corporate income and the total amount of undistributed profits. The difference between those two figures is the amount of distributed profits, or dividends. What I would like to know is the total tax paid on those dividends. If I knew that, I could calculate how much tax would be collected if all corporate profits were distributed. From what I've read, a large portion of dividends don't get taxed at all because they go to non-profits.
I had no luck Googling the amount of tax paid on dividends, so I had another brilliant idea: ask my congressman. That would be Mike Bishop. Getting information for constituents seems like a reasonable service a congressman's office might provide, right? Seems like they might know where to get that information. He is, after all, on the Ways and Means Committee.
Bishop's website has a page where you can send him a message, so I asked if he could get me the amount of distributed corporate profits and the amount of tax paid on those dividends for the most recent year they are available. His response was prompt but disappointing. It appears that his staff - or maybe a computer program - picked up on the word "tax" in my message and assumed I wanted to express my views on the Republican tax reform. So instead of an answer to my question, I got a long speech on how he wanted to "bring down tax rates for all Americans and simplify the tax code" blah blah blah.
Any suggestions on where I can get an answer to my question?
Update: I later send a message to Senator Debbie Stabenow to see if her office could get the info I need. No reply yet. But I also realized that I already know the rate paid on long-term capital gains - for 2014, anyway. This site says the rate paid on long-term capital gains was 18.8%, and I'm assuming the people who receive long-term capital gains are the same people who receive dividends.
But if those dividends and long-term capital gains were taxed as ordinary income, what would the rate be?
We know the top 0.1 percent of taxpayers received about 56% of the benefit of preferential tax rates for income from capital gains and dividends in 2016, while taxpayers in the top 1% received nearly four-fifths. (source) We also know that the adjusted gross income cut-off - the minimum - for taxpayers in the top 1% is $465,626 (source, table 7). So a reasonable estimate of the average AGI of dividend/capital gains recipients is $400,000.
$400,000 puts us within the 33% tax bracket (see 2017 tax brackets here). The tax on $400,000 is calculated as $52,222.50 plus 33% of the excess over $233,350. $400,000 minus $233,350 is $166,650. 33% of $166,650 is $54,995. $54,995 plus $52,222.50 is $107,217, which is 26.8% of $400,000. So if the average AGI of dividend/capital gains recipients is $400,000, the tax rate that would be applied to those dividends and capital gains would be 26.8%.
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