Taxing Dividends

The Costco board of directors will borrow $3.5 billion so that the company can pay a significant dividend to shareholders in December, rather than next year, before the looming tax increase on dividend income. This isn’t unusual in itself because corporations need to do what’s right for their shareholders. But it is interesting to see that one of Costco’s board members is Jim Sinegal, co-founder and former CEO of Costco, who actually gave a speech at the Democratic Party convention last summer in support of higher taxes.

The decision to pay the dividend in December instead of next year will save Sinegal $4 million in taxes, and the Costco board (all of whom are shareholders) collectively will save about $8 million. The Wall Street Journal nicely sums it up:

Here we have people at the very top of the top 1% who preach about tax fairness voting to write themselves a huge dividend check to avoid the Obama tax increase they claim it is a public service to impose on middle-class Americans who work for 30 years and finally make $250,000 for a brief window in time. If they had any shame, they’d send their entire windfall to the Treasury.

Well, we know that liberals have no shame, and the hypocrisy is indeed quite incredible. In addition to Sinegal, the Costco board also includes William Gates, Sr. (father of Bill Gates) and Charles Munger (buddy of Warren Buffett), two other high tax proponents.

Liberals often attack those who oppose tax increases by claiming that wage earners pay taxes at a higher rate than rich people such as Mitt Romney. Although the current tax rate on dividend income is 15%, it’s necessary to understand that corporate income is taxed twice:  first on the corporate level at 35% and then again on the individual level at 15%. If these two taxes are combined, we see that the owners of corporations are actually paying 44.75% of their income to the federal government. And this is not a marginal rate that applies to the highest income categories, but a flat rate that applies to all levels of income.

If the rate on dividend income goes up next year as scheduled (in the absence of any action by Congress on the fiscal cliff) to 43.4%, then the combined rate will be 63.2%. This means that the federal government alone (never mind additional state taxes) would be stealing 63.2% of the income of the owners of corporations. Even if the dividend rate were only 30% (the minimum required by the Buffett rule), the combined rate would still be 54.5%. It’s hard to characterize these rates as anything other than confiscatory, and the morality of them is suspect.

Critics sometimes call Obama a socialist and, of course, this generates mockery from the liberal propagandists. A socialist society is one in which the government owns the means of production so, notwithstanding the federal government’s equity interests in GM and AIG, America technically is not socialist. Yet anyone who receives more than half of the profits of a company can reasonably be considered as the “owner” of said company. In view of the tax rates that Obama and liberals are demanding on dividend income (as well as capital gains), the critics may not be so crazy after all.

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