The President's Proposed Tax Hike on Dividends

by Marilou Long on February 22, 2012

in Debt,Fiscal Policy,politics

Laura”s previous post on the Simpson-Bowles report underscores the challenges facing our country.  The huge deficits of the last several years are not sustainable, and as the sovereign debt problems in Greece and Europe illustrate, it is impossible to sustain lifestyle spending with ever increasing debt.  If your business or household is spending more than it takes in, you have to cut expenses and look for additional sources of revenue.

We work with high net worth clients, and they will feel the brunt of these proposed tax increases.  I think that most investors were prepared for the tax rate on capital gains and dividends to go up to 20% from 15%.  However, raising the dividend tax rate to 44% on individuals making over $200,000 and couples making over $250,000 is punitive and poor policy.  I think that it discourages people from saving for their own retirement.  If everyone expects the government to take care of them, there is no incentive to produce and save for the future.  Desperate politicians will continue to increase tax rates, tax revenues will enter a downward spiral, and we will start to see the same kind of social unrest here as we have seen in Europe.  From the

Who would get hurt? IRS data show that retirees and near-retirees who depend
on dividend income would be hit especially hard. Almost three of four dividend
payments go to those over the age of 55, and more than half go to those older
than 65, according to IRS data.

But all American shareholders would lose. Higher dividend and capital gains
taxes make stocks less valuable. A share of stock is worth the discounted
present value of the future earnings stream after taxes. Stock prices
would fall over time to adjust to the new after-tax rate of return. And if
investors become convinced later this year that dividend and capital gains taxes
are going way up on January 1, some investors are likely to sell shares ahead of
paying these higher rates.

The question is how this helps anyone. According to the Investment Company
Institute, about 51% of adults own stock directly or through mutual funds, which
is more than 100 million shareholders. Tens of millions more own stocks through
pension funds. Why would the White House endorse a policy that will make these
households poorer?

 

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