Dividend tax

A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company.

In many jurisdictions, companies are required to withhold at least the standard tax, paying this to the national revenue authorities and paying out only the balance to the shareholders.

Depending on the jurisdiction dividend income along with interest income, collected rents, or other "unearned income" may also be taxed and is the subject of recurring debate as to whether or not these taxes should be eliminated.

A corporation is a legal entity that can own property, sue or be sued, and enter into contracts. The corporation is, therefore, separate from its shareholders with a "life" of its own. As a separate entity, a corporation has the right to use public goods as an individual does, and is therefore obligated to help pay for the public goods through taxes.

Professor Confidence W. Amadi of West Georgia University has argued:

Although the above is an argument for corporate taxation as opposed to the taxation of dividends, arguments for the taxation of income from capital would apply to both and on that count it can be argued that from a social policy standpoint it is unfair, and unproductive economically, to tax income generated through active work at a higher rate than income generated through less active means. Also, because earned income derived from a corporation is also reduced by corporate tax paid, the application of a "double taxation" argument only in the passive unearned income argument, is logically inconsistent.

One issue with the above arguments in favor is that income must account for liabilities. If the corporation is treated as an entity separate from its shareholders then any of its gains are offset by equal growth of its liability to the shareholders (whom it owes all its assets). Thus net income is always zero and any tax would not be an income tax. If not separated from the shareholders, then corporate income tax is a sort of early withholding against expected future shareholders liability. Then the shareholders should get a deduction (from dividends and capital gains) for income taxed at the corporate level.

Critics, such as the Cato Institute, argue that a dividend tax amounts to unfair "double taxation". Double taxation refers to cases where tax is levied twice on the same income or gain, for example when a company incorporated in Country A has a branch in Country B, and both countries levy tax on the profits of the branch. This is often mitigated by tax treaties. The same can apply if an individual resident in Country A works in Country B, and both countries tax the employee's wages. But even within the same jurisdiction, profits can be taxed twice as when dividends, which are distributed corporate profits, are taxed in the hands of the shareholder, and the company has already paid a corporate tax on these same profits. This means that the shareholders, as owners of the profits, have already been taxed.

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