(21-07-2013, 07:31 PM)greengiraffe Wrote: [ -> ]Not too long ago, dividends are taxable and subject to franking (everyone included - rich and poor investors). The doing away for sec 44 and the phasing in of 1 tier tax on dividends - effectively meaning that the rich who received the bulk of dividends in personal capacity don't pay taxes.
This is an incorrect analysis. Previously, the companies paid corporate tax, accruing tax credits, and then passed these credits on when they paid dividends. Thus rich people paid more taxes because they received dividends, got the tax credits, and then paid taxes based on their (high) marginal rate. Poor people got the same pro-rata dividends and tax credits, but then paid taxes based on their (lower) marginal rate.
Suppose the corporate tax rate was 22%. If a company earned $1 per share before tax, it would pay 22 cents per share in tax. It could declare a $0.78 per share dividend, and this would come with 22 cents per share of tax credit.
A high-income person in (let's say) the 20% tax bracket would receive $0.78, grossed up to $1, then pay 20 cents in tax, leaving him with $0.80.
A low-income person in (let's say) the 5% bracket would also get $1 when grossed up, but pay 5 cents in tax, leaving him with $0.95.
With the one-tier system, the companies pay corporate tax, and then pay dividends which are tax-free. Effectively, it means that EVERY shareholder is paying the corporate tax rate on his/her dividend. This is essentially a tax increase on the low-income, rather than a tax relief on the high-income.
Under the same conditions as above, the company would declare a one-tier dividend of $0.78, tax-exempt. The 2 people above would receive the same amount, $0.78. Both have seen an increase in tax, but it is much more drastic for the low-income person.
It is actually more complicated in real life because the corporate tax rate is now 17%, which means that both people being studied would get $0.83 in dividends. Compared with the old days of S44 credits, the low-income person still gets less. But the high-income person now gets MORE.
So the one-tier system combined with the lower corporate tax rate has simplified our tax system, but at the cost of increasing income inequality.