The Motley Fool Discussion Boards

Previous Page

Retirement Discussions / Retired Fools

URL:  http://boards.fool.com/the-only-difference-is-the-one-group-earned-money-26870964.aspx

Subject:  Re: Is your 401(k) Inadequate For Retirement Date:  8/3/2008  4:25 PM
Author:  ChurchyLaFemme Number:  13787 of 19483

The only difference is the one group earned money from their effort. The owners made money because they had surplus money to invest. Why should they be singled out for favorable tax treatment? They already have more than the workers.

The whole "double taxation" is a charade, a farce perpetrated by the haves aganst the have-nots.

cliff


Cliff,


The double taxation argument comes about because the thought is that as co-owner of the corporation, you are taxed when the corporation pays out its taxes before dividends are paid and then when you receive dividend income as an individual. IOW, your stake in the enterprise is reduced because the coporate income tax reduces retained earnings (i.e. an addition to your stake in the firm). Then you are directly taxed on dividend income.

You could allow dividends to be deducted from corporate income as an expense, which reduces the corporate income exposure to taxation. Dividends would then be taxed as normal income and the amount paid out in taxes would then be subject to one's tax bracket net of dividend income.

This would have some interesting ramifications for shareholders as to whether or not they would want to receive dividends (reducing corporate AGI and taxes) or let the corporation have the money in which case corporate AGI would rise and that increase would be taxed. No matter which way you go, though, your stake as an owner is going to be affected whether you allow earnings to be completely retained or you realize some of those earnings as personal income. The same can be said of the current situation, however.

Here's a link to corporate income tax rates: http://www.smbiz.com/sbrl001.html#ci

Every company I'm invested in is well into the 35% bracket and I doubt that expensing dividends would put the companies into a lower tax bracket, although that could happen in a tight year. OTOH, in a tight year, dividends could be reduced or eliminated.

From the standpoint of a corporate CEO, I don't think it really matters whether or not the expensing of dividends is allowed. Well, except for one thing. Allowing dividends to be expensed might make shareholders less willing to invest in companies that still refuse to pay dividends, even those where management is doing a good job of growing the company.

Both taxes and dividends reduce corporate retained earnings and both affect one's stake in the company. You could conceivably pay out all income (after interest, depreciation and amortization but before taxes) in dividends. The corporation would have a tax rate of 0. OTOH, it wouldn't have internal resources to grow on and would have to acquire debt, the interest on which would reduce earnings. Business is a balancing act. You can't have your cake and eat it at the same time.

Churchy
Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us