Dividend Taxation, Part III
As a follow-up to the earlier post on dividend tax policy and implications, I received additional input from another knowledgeable reader. Bob, a CPA from Cleveland, writes:
I agree with Jack's take on the taxation of dividends but I have always held that it would be better if dividends were taxed but corporations were able to deduct the dividends paid. This would eliminate the double taxation of dividends but would also benefit dividend recipients in retirement plans. When you finally take money from your 401k it's taxable at ordinary rates-including all those dividends you received.
Pay special attention to Bob's point on 401ks. Even "tax free" dividends can become taxable income in some retirement plans. This is yet another reason to move from an income tax system to a consumption tax system. In the meantime, I have a suggestion to address this for those of you who can take advantage of a Roth IRA. My wife is a full-time homemaker. While I could shelter some cash from the government by investing in a traditional IRA for Lady Quixote, I do not. Instead, I pay my taxes this year, and then save as much as possible in a Roth IRA for my wife. With this money, I invest in companies that pay dividends. So long as Lady Quixote does not withdraw the money early, we will never pay taxes on any gains from these investments.
I suspect that the reason that this wasn't done was because it would be described as a tax break for "corporations" and as we all know, "corporations" (whatever that is) are BAD.
Could be. However, Napoleon Bonaparte's axiom Never ascribe to malice that which is adequately explained by incompetence may also apply. We have too many lawyers, and not enough representation of other professionals in office. Perhaps you and Jack should run for office someday. I have often thought of forming a Blog Party and organizing a stealth campaign. If I ever do so, I will be looking for candidates throughout the USA. If you (or any of my other readers) are interested, let me know.
Thank you for writing and sharing your professional expertise with us.
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