Tax Neutrality? Corporate Tax is down, now cap the Dividend and Capital-Gain benefit.

The dividend tax credit has always been defended under the concept of double taxation.  Tax the corporate profit and then tax the shareholder for the distribution of said profit.  And then there is the secondary argument that you need to provide an incentive for an investor to take the risk over buying bonds.

Both arguments are long overdue to be addressed.

Now we see Billion Dollar deficits and not one word about capping the Dividend Tax Credit for the uber wealthy. Cutting the corporate tax-rate by more than half and continuing the dividend tax credit is a blatantly self-serving strategy for the wealthy…and yet, no one objects!  The middle class do not get the same advantage with the dividend tax credit, as most of their equity (stock) holdings are held within IRA’s, 401(k)’s and other pension plans; which, as any advisor knows does not receive the same advantage from the dividend tax credit.  Worse; dividend income becomes taxable as ordinary income at the investors highest tax rate when he withdraws them from his qualified plan.

And now to the second point. Every investment adviser knows that stocks outperform bonds over the longer term.  Plus, how safe are bonds in a bankruptcy filing anyway?  If you look at publicly traded companies that filed for bankruptcy protection over the past several decades, bondholders are the ones who really take it on the chin.  Stockholders often find their shares are diluted, but they remain in control, and with lower debt they really compound that leverage to their own advantage.  There is no longer any reason to provide a tax incentive for people to invest in stocks over bonds. Wealthy investors have egos, they want control, ownership and higher returns …they do not want bonds.  Just ask Warren Buffett; if he would change his investing philosophy if dividends became taxable?  The answer is no. In addition, the uber-wealthy do not make the majority of their income from salary or wages, it is from tax favored dividends and capital-gains.  Why is no one talking about reducing, eliminating or capping the dividend tax-credit or capital-gain benefit?  This linkage between corporate profits and the dividend tax-credit holds the solution to make the corporate tax reduction revenue neutral, without affecting healthcare or the mortgage interest deduction that squarely benefit the middle class.

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