America Trumps OECD in Dividend Taxation
New data from the nonpartisan Tax Foundation show America’s average combined state and federal tax rate on personal dividend income is 28.6 percent. Seven states have no dividend income tax at all, but their taxpayers are still subject to the federal government’s 20 percent top tax
rate on personal dividend income, in addition to a 3.8 percent net investment tax on unearned income that helps fund the Affordable Care Act.
Two states, Tennessee and New Hampshire, do not tax any income except for personal dividend income. However, legislators in Tennessee are currently attempting to phase out Tennessee’s “Hall Tax” on dividend income and taxable interest.
The data show that the highest combined state and federal tax rate on personal dividend income is in California. When combined with the federal dividend and net investment taxes, California taxpayers pay a 33 percent top marginal tax rate on personal dividends. Only five OECD nations have a higher top marginal rate than California’s.
America’s 28.6 percent average combined top tax rate on dividends is 3 percentage points higher than the OECD weighted average of 25.5 percent. The U.S. average ranks 9th highest out of the 34 OECD countries. Ireland’s top personal dividend tax rate of 48 percent is the highest. Estonia and Slovakia are the only two OECD countries that do not tax personal dividend income.
Personal dividend income taxes are layered on top of corporate income taxes, creating inefficient double-taxation. When the personal dividend and corporate income taxes are combined, 56.5 percent of corporate earnings before taxes are paid to the government. When more than half of earnings are lost to taxes, it is no surprise that many U.S. corporations are moving more of their operations and staff overseas.
Personal dividend income taxes hinder investment, creating less capital available for projects that increase efficiency or add more workers. This makes companies less productive and lowers employee wages. The tax also hurts pension funds that rely on dividends and capital gains, as well as individual investors who depend on dividends for income—especially retirees.
Abolishing the double-taxation on dividend income will spur investment and job growth, in addition to stabilizing retirement funds. The United States would be wise cut its top personal dividend income tax rate down to the OECD average, or, better yet, eliminate it entirely.