Split-rate taxation (chapter 23)

[abumenang]

Hi there,

In the core reading under split-rate taxation, there is a paragraph saying:

"This system is often used when income and capital gains are taxed at different rates. Thus a higher level of income tax than capital gains tax would be coupled with a higher tax rate on retained profits than on distributed profits."

This seems to be the wrong way around to me as the higher level of income tax should apply to the distributed profits (dividends). Am I misunderstanding the statement in the core reading?

Thanks!

 

[loadingr]

I was really puzzled by this paragraph as well. I try to understand it as so the whole tax system is more in a balance as income and capital growth are kind of taxed at similar level (offsetting effect between the two policies).

 

[Colin McKee]

tax systems

Yes - essentially if investors are taxed higher on income that gains (which they normally are) there will be an incentive for companies to reduce dividend payments. To counter this, retained profits are taxed at a higher rate in the corporation tax system, so the tax man hits you no matter what you try to do