The Accumulated Earnings Tax

The accumulated earnings tax can greatly influence corporate decisions. Here are the basics of the accumulated earnings tax and what it means to you as an investor.

Accumulated Earnings Tax

The accumulated earnings tax was designed to encourage companies to issue dividends to shareholders. If the government decides that a company is hanging onto too much capital, they can choose to implement extra taxes on them. Therefore, the company will not benefit from accumulating their earnings.

Reason for the Tax

The government came up with this tax in order to increase tax revenue. Without this law, many companies would consider keeping their surplus in order to drive up the price of stocks. With this policy, companies are encouraged to provide larger and more frequent dividends to their investors.

Capital gains are taxed at a lower rate than dividends are in most cases. If investors did not receive dividends, they could potentially realize a greater profit from the share price of the stocks. All of the money would then be taxed at the capital gains tax rate, which would reduce the amount of money that goes to the government. By enticing companies to offer more dividends, it means more tax revenue will be coming in.

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