How to murder the UK pensions system
Posted by Christie Malry on February 24, 2010 at 10:48 pm
Over at Murphy's den, 'Carl' suggests that we tax dividends on distribution.
You could tax dividends upon distribution as a withholding tax. (EU rules are a huge problem, of course, but in principle it would work.) I do not see why this is regressive. In order to get it progressive, the withholding tax would have to be high (50 percent) and reclaimable for low incomes.
We can only hope he means instead of, instead of incremental to, the existing corporation tax. But, given that companies can choose when to distribute, yet can't as easily choose when to make a profit, I suppose he must mean as well as corporation tax.
Carl's idea would have an immediate impact - it would, overnight, stop every single UK company from paying a dividend. Instead, they would force shareholders who want income from their investments to sell portions of their holdings to realise capital gains. This isn't that smart an idea, really, because some people (think pensioners) need income.
I suspect the move would be very bad for the UK pensions system too. Increasing the tax take from UK companies would have a very detrimental effect on those seeking to save for their retirement. This is dumb - we should be making it as easy as possible for people to save, not making it more expensive.
Incidentally, Steven Bank has written an interesting academic paper on the history of double taxation of corporate earnings (i.e. a corporation tax on profits plus tax on dividends in the hands of investors). Rethinking Double Taxation's Role in Dividend Policy: A Historical Approach suggests that corporate managers agreed to double taxation of profits between WW1 and WW2 because it helped them resist calls by shareholders for them to distribute excess cash.
[...] Then there are those that argue that corporation tax is the result of an unholy deal between governments and company managers. Governments get the money. Managers then support government proposals for double taxation of dividends (i.e. making tax credits non-reclaimable). That reduces shareholder pressure to distribute excess cash, leaving more in the company to be controlled by managers (I covered this before here). [...]