Dividends are the owners' share of the profits of a business.
Interest earned is the amount of money a bank pays you for the use of your money.
As an owner, you may not receive a dividend if the value of the stock goes down too much.
As a depositer, you do not lose your deposits. You are not investing your cash assets (converting them from cash to ownership interest in another asset).
As an owner receiving dividends, the business profit being distributed to you is new income. The business profit was already taxed as business income.
As a depositer, the interest earned on your cash is new income to you. Your cash deposits were taxed as income when you earned it. The deposits are not taxed again. Only the interest earned is taxed.
-PJ
I undedrstand the techinical difference, primarily that of a formal ownership stake. I still have a hard time reonciling why there is any difference in double taxation outside of that ownership stake.
A bank could potentially get more deposits, which would allow it to do whatever other transactions generate profits, if it could offer a higher interest rate say on a savings account. I assume the bank is taxed on it's profits like any other business (not to mention likely having a massive regulatory burden but that is a different issue).
I assume that the interest rate that a bank is willing to pay on a savings account is essentially the expected rate of return for reuse of the money through loans, etc., less the cost of doing business (including taxes on the profits realized through the reuse of deposits) less the profit.
Again I am not a banker, or an accountant. I just see a bank as a business. If that business doesn't make money I don't have a bank so I want them to make money. The interest rate they give me, while not the result of a direct ownership stake seems dependent on the cost of doing business which includes taxes on profits much like a publicaly traded company. As a result the interest rate I get is what they are willing to pay after they already pay taxes on their business and seems similar to dividends from a comopany that pays out after paying costs including taxes. One is known upfront, one is known later, both variable.
Personally, it isn't an issue, but think taxing either is double taxation on the money I put in that was already taxed anyway. THe only real difference is the level of risk/reward I am willing to take with my already taxed dollars. As you note, at least some of my dollars in a bank are "insured" while they are not in say a stock that yields dividends.
But if my investment in a bank is high enough a portion of that is at risk, though that risk is much less than in stock. That raises a new question for me, should interest earned on deposits greater than insured be treated as dividend income?
Take care.