President Bush has announced that he will introduce legislation eliminating income tax on stock dividends. This is a bad idea,for the following reasons:1. It gives the tax exemption to the wrong entities.If corporations are to be encouraged to pay dividends, make dividendstax deductable to corporations. This would encourage corps in theposition to pay dividends more likely to do so, and encourage ones thatalready do so to have both better cash positions (due to lower taxes)and pay higher dividends.Dividends are so low nowadays that the tax exemption isn't going todramatically help many individuals, particularly since so many people own stock in tax-deferred devices like IRA's and 401-K's (more on this later...)Maybe giving the exemption to corporations is bad politics at themoment, but if the "double taxation" of dividends is what is to beaddressed here, it makes the most sense to give corporations the taxwriteoff.2. What about IRA's/401K's?Currently, what you withdraw from a IRA/401K is taxed as ordinaryincome, unless it is from a Roth, in which case it is tax-exempt. Whatabout dividends from a stock in a 401K? Is this going to be taxed as ordinary income as well? In other words, it may now be advantageous toown dividend-yielding stocks _outside_ of an IRA/401K if dividends aren't taxed.So, what do the tax pros think?--Foobarista
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