Final answer:
The policy rationale for the taxation of interest and dividend income involves the benefit and ability to pay principles, ensuring that taxation reflects benefits received and the taxpayer's financial capacity. Tax laws are adjusted to balance raising revenue and influencing economic activity, also taking into account equity and efficiency.
Step-by-step explanation:
The underlying policy rationale for the current tax rules applicable to interest income and dividend income is rooted in a combination of the benefit principle of taxation and the ability to pay principle. Interest and dividend income are forms of revenue for individuals and corporations, and are taxed according to how much benefit is derived by the entities and their ability to shoulder the tax burden. Additionally, tax laws are often designed to achieve a balance between raising sufficient revenue for government programs while influencing the overall level of economic activity through discretionary fiscal policy.
Tax rules for interest and dividend income strike a balance between equity and efficiency. They are meant to ensure that those who can afford to pay more do contribute more to the funding of government services, and at the same time, do not overly penalize investment and savings which are essential for economic growth. Revisions to these tax rules can reflect changing social and economic goals, as politicians and government officials adjust policies to promote certain behaviors or address income inequality.