dividend tax question.

[noob_trad3r]

Shareholder means you are part owner of the company correct? So if the company paid taxes on its earnings then why do I have to pay taxes on dividends?

Wont that be like getting a paycheck net after taxes and then at the end of the year having to pay another 15% on top?

 

[RobtF]

You hit on it - the famous "double taxation of dividends." Conservatives argue that this should be abolished.

 

[TraderZones]

Quote from noob_trad3r:

Shareholder means you are part owner of the company correct? So if the company paid taxes on its earnings then why do I have to pay taxes on dividends?

C Corporations are double taxed.

And you could argue for workers of a company who also happen own it. Such as people who get stock options or buy their company's stock.

If the company is taxed, why should their wages be taxed?

 

[morganist]

you get taxed twice. it used to be in england that if you saved for a pension that tax would be waived it is called dividend imputation but it was abolished about a decade ago.

companies do not get taxed on debt capital so it is cheaper for them to have debt capital than equity capital because they can write off the interest on debt against tax.

i asked a couple of weeks ago whether this might be the reason why so many companies had debt, if you are interested in this look up weighted average cost of capital.

there are industries based on these areas mainly corporate banking looking at the corporate structure to save or make money.

but yes it is not good to a double tax so lobby congress.

 

[theDudeAbides]

Quote from morganist:



companies do not get taxed on debt capital so it is cheaper for them to have debt capital than equity capital because they can write off the interest on debt against tax.

i asked a couple of weeks ago whether this might be the reason why so many companies had debt, if you are interested in this look up weighted average cost of capital.

True, companies do get a tax shield from the interest payments they make to debt holders. But debt is primarily "cheaper" than equity because the issuance of debt does not dilute equity holders (and their EPS).

The primary reason why equity capital is more expensive because investors expect a higher return for the greater amount of risk inherent in equity (relative to debt). Their equity return hurdle would of course be quite a bit lower if their dividends were not taxed.

But don't forget that interest payments received by debt holders are taxable income as well. So, it's hard to pin the reason for debt capital being "cheaper" to companies than equity for tax-driven reasons alone. (As investors look at after-tax return rates).

OP asks a great question that proves politicians of yesteryear didn't understand corporate finance either.