Tax rates on dividends increased in 2013 for certain high-income taxpayers. These increases are due to (1) increased rates on dividends for taxpayers in the top income tax bracket enacted as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240 ); and (2) a 3.8% tax on net investment income, including dividends, for taxpayers with modified adjusted gross income above certain thresholds. Before ATRA, current law would have treated dividends as ordinary income for tax purposes after 2012. Thus, the permanent tax rates on qualified dividends in ATRA were an increase in tax rates for certain high-income taxpayers relative to current policy and a decrease in tax rates relative to current law . These provisions of ATRA, in part, reversed the effect of qualified dividends having been taxed at reduced tax rates since 2003. Before 2003, dividends were treated as ordinary income for tax purposes. Past tax reforms have often changed the tax treatment of dividends. Hence, as Congress evaluates tax reform options, changes to the tax treatment of dividends may be considered. In the context of a base-broadening, rate-reducing tax reform, increasing tax rates on qualified dividends is one option for raising revenue that could be used to reduce marginal tax rates. Taxing dividends as ordinary income could raise revenues sufficient to offset a 1.3% reduction in individual income tax rates, meaning the top tax rate could be reduced by roughly 0.5 percentage points, from 39.6% to approximately 39.1%. Since the dividend tax can be viewed as part of the system to tax income from corporate equity, another option would be to increase the tax on dividends to finance a corporate rate cut. A rough static estimate suggests that taxing dividends at ordinary rates could allow corporate tax rates to be reduced by roughly 4.6%, allowing for a revenue-neutral reduction in statutory corporate rates from 35.0% to an estimated 33.2%. House Ways and Means Committee Chairman Dave Camp proposed changing the tax treatment of dividends in his discussion draft, the Tax Reform Act of 2014. Specifically, in his proposal, dividends would be taxed as ordinary income, with 40% of capital gain and qualified dividend income excluded from taxable income. This report provides background information useful to evaluating potential changes in the tax treatment of dividends. The first section of this report summarizes the current law tax treatment of dividends. This report also reviews economic issues related to efficiency, equity, and macroeconomic considerations. The final sections discuss dividend tax policy options, including integration options, where the corporate and individual income tax systems would be designed so that dividend income is taxed once. The tax treatment of dividends depends on the recipient. Under current law, dividends received by individuals are generally taxed at reduced capital gains tax rates. For 2013, the maximum tax rate that applied to qualified dividends received by individuals was 20% (see Table 1 ). The 20% top rate applies to taxpayers in the 39.6% income tax bracket (single filers with taxable income above $400,000; married filers with taxable income above $450,000). Taxpayers in the 25% to 35% tax brackets pay a rate of 15% on dividend income, while taxpayers in the 10% and 15% tax brackets have a 0% tax rate on dividend income. Dividend income may also be subject to a net investment income tax. Beginning in 2013, a 3.8% tax is imposed on the lesser of (1) net investment income; or (2) the excess of modified adjusted gross income (MAGI) above a threshold amount. This threshold amount is $250,000 for taxpayers filing a joint return, $200,000 for single filers, and $125,000 for married filers filing separately. Corporations may claim a deduction for dividends received. This deduction helps prevent multiple-level corporate taxation of dividend income. Ultimately, dividends are taxed when received by non-corporate shareholders. Corporate shareholders can deduct 100% of dividends received from corporations in the same affiliated group, 80% of dividends received from corporations where the recipient owns at least 20% of the payee's stock, and 70% of dividends received from other corporations. Additional limitations prevent full deductions for stock purchases that are debt-financed. Tax-exempt entities that receive dividends are not required to pay tax on most types of dividends received. Dividends are specifically exempt from the unrelated business income tax (UBIT). Taxing qualified dividends at reduced tax rates reduces tax revenues. For 2012, the tax expenditure estimate for the preferred tax treatment of qualified dividends was $29.8 billion. The cost of this tax expenditure should decrease post-ATRA, as there may have been a surge of dividends in anticipation of the rate increases enacted in ATRA. Distributional analysis examines how dividend income is distributed across the income spectrum. As is discussed below, dividend income tends to be concentrated at the top of the income distribution. Equity analysis examines the distribution of the burden of taxes on dividends, which may differ from the distribution of dividend income if taxpayers are able to shift tax burdens. Equity analysis is also concerned with issues related to "double taxation," and the ultimate effects of taxing corporate equity income at both the corporate and individual level. Income from corporate equity investments, including dividends, is often subject to higher taxation than other types of investments; as such income is taxed in both the corporate and individual income tax systems. For example, $1 of net corporate income would be subjected to the corporate tax rate of 35%, generating $0.35 of tax and leaving $0.65 of after-tax income. If the $0.65 of after-tax income were paid out as a dividend, an individual receiving that dividend may be taxed at a maximum rate of 39.6%. This individual would pay an additional $0.26 of tax if dividends are taxed as ordinary income (39.6% of $0.65). Hence, in this example, the tax rate on $1 of net corporate income paid out as a dividend to an individual would be 61% ($0.35 corporate in corporate tax plus $0.26 in tax at the individual level). The taxation of dividends at both the corporate and individual level is the so-called "double taxation" of dividend income. Under current dividend rates for qualified dividends, the additional dividend tax would be $0.13 (20% of $0.65) and the total tax would be 48%. Not all dividends are subject to double taxation. Dividends paid to nonprofit institutions, pension funds, state and local governments, and certain retirement accounts are not subject to double taxation. In 2009, roughly 44% of dividends paid by corporations were reported as income on individual income tax returns. Thus, in 2009, roughly 56% of dividends paid were not taxed at the individual level. Both vertical and horizontal equity issues are relevant when evaluating the tax treatment of dividends. The distribution of the tax on dividends, whether the burden of the tax is more likely to be borne by higher income individuals, raises issues related to vertical equity. As discussed below, a discussion of corporate tax incidence is useful to inform equity issues related to dividend taxation. The "double taxation" of dividends also raises issues of horizontal equity. Are holders of corporate stock treated unfairly compared to holders of corporate bonds or other investments? The receipt of dividend income is concentrated at the top of the income distribution—both in terms of the share of returns with dividend income and the value of dividend income claimed. Overall, 17% of tax returns filed in 2011 reported income from qualified dividends (see Table 2 ). Higher income returns were more likely to have income from qualified dividends: rising from 8% of returns with AGI less than $15,000 to 87% of returns with an AGI of $1 million or more reported income from qualified dividends. In 2011, 53% of qualified dividends were reported on the top 2% of returns (those with adjusted gross income of $250,000 and above). Middle-income taxpayers may be more likely to indirectly hold stocks, via pensions and retirement savings accounts, for example. Dividends paid through these investment vehicles, however, may not be directly subject to tax. There is some concern that taxing dividends as ordinary income would disproportionately affect elderly taxpayers. In 2011, nearly half (49.4%) of qualified dividends were reported by taxpayers age 65 and over. For taxpayers age 65 and over, 40.3% received qualified dividends as income in 2011. Across all other age groups, 13.3% received qualified dividends as income in 2011. Interest income, which is taxed at ordinary rates, is similarly distributed. In 2011, 50.0% of interest income was reported by those age 65 and over, while 70.7% of taxpayers age 65 and over reported interest income (as compared to 29.7% of taxpayers in other age groups). Higher-income elderly earn a larger portion of their income in the form or interest, dividends, and rents than lower-income elderly. This follows trends observed across taxpayers as a whole, where qualified dividends are disproportionately received by higher-income individuals (see Table 2 ). In 2010, those age 65 and over and in the lowest income quintile received 1.8% of income from assets, where income from assets includes interest, dividends, and rents. For those age 65 and over in the highest income quintile, 16.1% of income was from assets. Thus, while the elderly are more likely than other taxpayers to receive dividends as income, such income is a small portion of total income for low-income elderly. Vertical equity analysis examines how taxation of dividends contributes to the progressivity of the overall tax system. As illustrated in Table 2 above, higher income taxpayers are more likely to have income from qualified dividends. Capital income generally, which includes capital gains, capital income from closely held businesses, interest income, and a portion of retirement distributions, in addition to dividend income, is also concentrated among higher-income taxpayers.