Why Are Dividends and Income Taxed So Differently?

10.16.08 | Taxes, Work | 2 Comments | by Fred Siegmund

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In 2007, someone starting out in their twenties with a modest $30,000 a year salary will be expected to pay $5,091.25 in federal income and payroll taxes. For a single person who earns the same $30,000 as dividend income, the total federal tax would be $1,062.50.

For a married couple starting out where both earn a $30,000 a year salary, they pay federal tax of $10,182.50. For a married couple who earns the same $60,000 as dividend income they pay $2,125 in total federal tax. There is no payroll tax on dividend income.

This extraordinary favoritism toward corporate dividends has been going on since 2003. It not only debases work but changes America's saving and consumption. A couple starting out in their twenties will be unlikely to have dividend income, but their very high taxes make it difficult to save anything, or buy a house.

Those with dividend income since 2003 are likely to be older with years of saving and a nest egg of savings and dividend income. Likely as well, they already own a home. Their lucrative tax breaks have generated savings for them and loanable funds for banks and financial intermediaries.

Apparently, they all forgot that savers earn a return only if borrowers can pay back their loans. The millions of sub-prime mortgages and the rapid and large number of foreclosures and defaults make it clear those who are starting out and many others cannot afford to buy a home, or borrow all those loanable funds.

There was a comment in one of my previous posts where a reader suggested Congress and the Bush administration has been pushing sub-prime loans to boast home ownership for political reasons. I am sure that is correct and recent testimony and discussion in the Wall Street Journal confirms that view.

It is the same Congress and Bush Administration that promoted tax breaks for dividends and ignores the income inequality their policies help to generate. It makes no difference what any one says about fairness in taxes.

America has to raise taxes on the wealthy and give tax relief to working Americans, or the economy will continue to flounder and decline.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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