With all that have been discussed: the Canadian economy, dividend income taxation, and the impact of dividend income taxation in Canada’s economy, we now go to the discussion topic: “is the taxation of dividend income creating inefficiency in the Canadian market place? ” In order to avoid the negative externalities associated by returning some of the earnings of a corporation to its owners, some corporations have chosen the creation of holding or nominee companies. These nominee corporations are “incorporated in a jurisdiction such as the United Kingdom or Canada without exposing the assets to taxation there” (closetrustees.com).
On the other hand, the Canadian government through its Department of Finance admits that “Canadians know that the taxes they pay reduce economic growth and job creation in the private sector” (www. fin. gc. ca). This is another of the inefficiencies created by taxing dividend income and of course, by taxing other forms of income. Perhaps this is one of the reasons why Canada together with the United States has the “lowest productivity growth rates among the G7 economies in the 1980s and 1990s” (Schmitt & Mishel 40).
During these times, the average annual growth rates of Canada steadily declined (Schmitt & Mishel 42). Sawyer opined that tax incentives to save in the country failed to generate real investment (127) Another marketplace inefficiency brought about by taxing dividends is corporations would rather raise capital by contracting debt rather than through issuing additional equities. Capital from debt instruments is much cheaper. This would then constraints the participation of the public in wealth accumulation through corporations.
As a result of the double taxation on dividend income, dividends in Canada now pay higher taxes than capital gains, for example. This gives a disincentive for corporations to pay dividends, the proceeds from which might improve the standard of livings of the stock holders. What the Canadian government proposed in June 29, 2006 clearly reflects that the government is aware of the inefficiencies brought about by taxing dividend income. In a “draft legislation” (deloitte. com) the government proposed to “reduce the tax rate on certain dividends received after 2005 by individuals and trusts” ” (deloitte.com).
Although this doesn’t eliminate the inefficiencies, it does reduce their financial impact. Some economists take the debate on the economic inefficiencies created by taxing dividends. These “neo-classical [economists] argue that all types of taxation result in distortion of the market and economic inefficiency” (rateempire. com). The economists who are labeled as libertarians, on the other hand, “argue that almost all forms of taxes are immoral due to their involuntary and therefore eventually coercive or violent nature” (rateempire. com).
The followers of anarcho-capitalism portent the “most extreme anti-tax view” (rateempire. com). These people looked upon the “[state’s] interfering with an individual's earnings or demanding a share of it to facilitate salvaging downtrodden classes of society” (rateempire. com) with “intense scorn” (rateempire. com). Conclusion Double taxation on dividends does create inefficiencies in the market place. Corporations and individuals have created several ways to avoid corporate earnings from being taxed when a part of it is distributed to stockholders.
So far, there are no legislations against these creative ways. Corporations and individuals, for example, set up holding companies to avoid dividends from being taxed. Clearly, dividend income is a burden to all stock holders and the corporations issuing such dividend. Until such taxation is fully explained and justified to the Canadian taxpayer, then the inefficiencies resulting from double taxing dividend income will remain. Some even agree that the taxes we pay to the government are the trade-off we get for the right to earn; one of these taxes is the tax on dividends.
The government had recognized the importance of supporting Canadian businesses with regard to their development and containment of international competitiveness. The Department of Finance suggested that the government, in order to support Canadian businesses in competing in the international market, should review the tax system (fin. gc. ca). The Department supported this suggestion by arguing that “the total burden of taxes on business impairs its international competitiveness, we believe that the government should consider action to reduce that burden” (fin.
gc. ca). Perhaps, in doing so, the government can reduce or eliminate the economic inefficiencies brought about by some of its taxation programs such as the taxes on dividends. Lastly, the government in reviewing and updating its tax system should not only think about reducing or eliminating the inefficiencies caused by taxing dividends but it must also try to lessen the income disparity among its citizens.
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The World Economy: A Millennial Perspective. Paris: OECD, 2001. rateempire. com. Purposes and Effects of Taxation. www. rateempire. com, 2006. Sawyer, M. “Canada’s two economies. ” International Review of Applied Economics 14. 1 (2000): 127-133. Schmitt, J. & Mishel, L. “The United States is Not Ahead in Everything that Matters. ” Challenge 41. 6 (1998): 39-59. Walsh, R. “An historical framework for the federal taxation of dividend and interest payments in the US. ” Accounting History 6. 1 (2001): 61-74.