TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Wednesday, February 22, 2012

WSJ: Obama's Dividend Assault

Wall Street Journal editorial, Obama's Dividend Assault:

President Obama's 2013 budget is the gift that keeps on giving—to government. One buried surprise is his proposal to triple the tax rate on corporate dividends, which believe it or not is higher than in his previous budgets.

Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today's 15% rate.

Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.

In previous budgets, Mr. Obama proposed an increase to 23.8% on both dividends and capital gains. That's roughly a 60% increase in the tax on investments, but at least it would maintain parity between taxes on capital gains and dividends, a principle established as part of George W. Bush's 2003 tax cut.

With the same rate on both forms of income, the tax code doesn't bias corporate decisions on whether to retain and reinvest profits (and allow the earnings to be capitalized into the stock price), or distribute the money as dividends at the time they are earned.

Of course, the White House wants everyone to know that this new rate would apply only to those filthy rich individuals who make $200,000 a year, or $250,000 if you're a greedy couple. We're all supposed to believe that no one would be hurt other than rich folks who can afford it.

The truth is that the plan gives new meaning to the term collateral damage, because shareholders of all incomes will share the pain. Here's why. Historical experience indicates that corporate dividend payouts are highly sensitive to the dividend tax. ...

WSJ

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. ...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?

Seldom has there been a clearer example of a policy that is supposed to soak the rich but will drench almost all American families.

http://taxprof.typepad.com/taxprof_blog/2012/02/wsj-obamas.html

Tax | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef016762c943e2970b

Listed below are links to weblogs that reference WSJ: Obama's Dividend Assault:

Comments

It looks as tho the WSJ got the numbers for its chart by adding "qualified dividends" to "ordinary dividends", even tho one is a subset of the other. More mathematical illiteracy in the service of politics. Actually, the biggest increase from 2003 on was in *non-qualified* dividends that are taxed at regular rates. See http://www.irs.ustreas.gov/pub/irs-soi/09intba.xls for the numbers.

Posted by: Tai Shan | Feb 22, 2012 9:55:18 PM