NPR had a report this morning on the debate over extending the lower tax rate on dividends. The report correctly pointed out that the vast majority of this tax cut will go to the richest 1 percent of the population. It also noted the ambiguity of the evidence showing any substantial link between lower dividend taxes and increased investment and growth. However, the report neglected to point out that the vast majority of stockholders do not benefit from the cut in the dividend tax rate.
The reason is simple. Most stockholders hold most or all of their stock in retirement accounts. These accounts accumulate money tax free as long as the money is in the account. When a worker retires and pulls money out of the account, the money (all of the money) is taxed as ordinary income. This is regardless of whether the money in the account came from wages, dividends, interest or capital gains. (The tax is paid in advance with Roth IRAs, but holders of these accounts also get no benefits from the tax cut.)
I have discovered that many people are confused on the impact of this tax cut and that many holders of retirement accounts believe that they benefit from it. In fact, I remember arguing at length with an economics reporter from a major city paper who was convinced that he was getting a tax break on the money in his 401(k). It is very simple to point out that holders of retirement accounts do not benefit from the dividend tax cut. At least then the public would know who gains from this tax cut. It's too bad that NPR listeners will remain ignorant on this point.
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