DOUBLE TAXATION OF DIVIDENDS

What Would Be The Effects Of Eliminating The “Double-Taxation” Of Dividends?

What Would Be The Effects Of Eliminating The “Double-Taxation” Of Dividends?

Direct investment is an investment in a business that confers significant control and ownership in the business as opposed to “debt investments,” such as bonds, in which the investor purchases the right to be repaid a certain amount at a later date. Debt investment brings the guarantee of a certain minimum payoff and presents a scenario in which the payoff to the investor is divorced from the circumstances of the company. Equity investment, of which direct investment is a subtype, sacrifices that guarantee in return for profit participation (either direct, or in the case of stock ownership, indirect, under the assumption that a more profitable company pays higher dividends and has a stock that performs better) (Utz 2003).

For instance, ownership of a sufficient quantity of a public company's stock to confer significant influence, or controlling interest, is a form of direct investment. Partial ownership of a real estate development company by a Savings & Loan as part of the condition of issuing a mortgage or business development loan is another form, and was a factor responsible for the Savings &Loan crisis of the 2000s, because too few of the bankers in such positions were competent business managers—another risk against which debt investments shield the investor. Profits from direct investment are in the form of dividends and capital gains (Thorndike 2002). Dividends are paid by corporations to their shareholders, in proportion to their shareholding (the total amount of money to be paid out in dividends is divided by the number of shares and paid accordingly) (Pechman 2007). Dividends are usually paid on a fixed schedule, but not at a fixed amount; the amount will depend on the company's performance, like staff splitting up a joint tip pool at the end of the shift. A special dividend may sometimes be paid outside of, and in addition to, its normal dividend schedule (because of this, it is paid only to those who owned shares three days prior to the record date, in order to prevent anyone from buying up stock in order to collect the higher than average dividend). There are various reasons for a corporation to pay out a special dividend, which like other dividends is counted as an expense (in a joint-stock company, it is not an expense but the division of an asset).

Though dividend payments are sometimes grumbled about by those paying them out, who feel the money would be best reinvested in the company—and indeed some shareholders choose to reinvest their dividends by buying more shares of stock—there is some indication of a correlation between dividend payments and earnings growth, which could mean dividends indicate corporate confidence(Oliver 2004). A separate argument against dividends points out the double taxation the money undergoes: the corporation pays a tax on the profit it has made, and the individual stockholders pay an additional tax on their portion of the profit that has been shared. In that sense, retaining earnings and reinvesting them in the company at the business level is a ...