Since the inception of income taxes in the early part of the twentieth century in the United States, dividends received on investments have been treated as ordinary income, when received by individuals, and taxed at ordinary tax rates. In contrast, the price appreciation on an investment has been treated as capital gains and taxed at a different and much lower rate. Figure 10.10 graphs the highest marginal tax rate on dividends in the United States and the highest marginal capital gains tax rate since 1954 (when capital gains taxes were introduced).

6 Adding to the uncertainty is the fact that the tax changes of 2003 are not permanent and are designed to sunset (disappear) in 2010. It is unclear whether the tax disadvantages of dividends have disappeared for the long term or only until 2010.

Figure 10.10: Ordinary Income and Capital Gains Tax Rates

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