StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Dividends Tax Rate Next Year?

29 Apr 2010
Posted by Pete Davis

Congress is beginning to realize how expensive it will be to cap the dividends tax rate at 20% for those earning over $250,000 beyond the end of this year.  Yesterday, House Ways and Means Chair Sander Levin (D-MI) told the Bureau of National Affairs that it would be "very expensive" and that there was no provision for exempting it under the Budget Act or for "paying for" it at a cost of $138 b. FY11-FY20.  Congressional taxwriters have spent the last few months struggling to find ways to "pay for" $31 b. of extensions of expired tax provisions and would have a much more difficult time finding $138 b. worth.  President Obama has proposed setting the dividends and capital gains rates at 20% for all taxpayers.  So far, there have been no signs that Congress is ready to grapple with the issue of extending the 2001 and 2003 Bush tax cuts.  It could easily fall over until a lame duck session after the election.  If nothing is done, under present law, the dividends tax rate for those over $250,000 would rise to 43.4%, equal to the 2011 top income tax rate of 39.6% plus the recently enacted HI tax of 3.8% on the unearned income of those over $250,000.   If that's allowed to happen, it will kill the stock market for a while.

Dividends should be taxed as ordinary income least at the individual level.

Economic arguments against the "double taxation of dividends" (which is a silly name as all sorts of income is subject to multiple taxation under our current system) are much stronger when the tax exemption is at the corporate level (i.e., let corporations deduct dividends paid from taxable income as they do with interest paid). That has the added benefit of eliminating the incentive for excessive debt financing that exists today. However, it still doesn't address the tax revenue shortfall issue. I really wish VAT wasn't such a politically toxic position.

Double Taxation

Rue the Day,

I wonder if you could list 3 or 4 examples of the many types of income that, like dividends, are subject to double taxation?

The 3.8% tax

That extra "excise" tax doesn't go into effect until 2013 I believe, so there really is no immediate impact from that piece - it's the simple expiration of the special tax rate for dividends that makes the biggest impact and could take effect next year - bumping those taxes from 15% to 39.6% for some people is a huge boost.

I'm not sure it hurts the stock market right away, what are those investors going to do? Move to bonds that are also taxed at the same rate? Move to municipal securities perhaps - but very few people invest in dividend paying stocks exclusively for the dividend, they are looking for growth on their assets as there are many higher yeilding investments out there.

What it could do is lessen the amount of money available to re-invest in the stock market and that could greatly affect the on-going growth. The administration understands this, that's why I find it unlikely they will not address it. Going to 20% from 15% and then adding the 3.8% a few years later would not be a disaster. The greatest periods of stock market growth in our nations history were all during periods when the taxes on those investments were higher than they are now.

Aw, gee

"If that's allowed to happen, it will kill the stock market for a while."

The DJIA is up about 3,000 points (ca. 35%) in the past year. The broader S&P500 is about the same on a percentage basis.

Income, actual economic growth, and jobs are not even close to that. Even a 20% hit (which, given the dividend component of the dow, at least, would be excessive) would leave the stock market in better shape than the rest of the economy.

real peoples income

real working people have had no increase in hourly working income for 30 years. time for the wealthy to pick up the slack.

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