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Pepperdine University School of Law

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Thursday, July 26, 2012

Throwing Granny Off the Tax Cliff

Dividend LogoWall Street Journal op-ed:  The Tax Cliff Endangers Seniors:

Most people know that the U.S. government is rapidly approaching the edge of a fiscal cliff that will raise taxes for millions of Americans—at every income level and age. What is less known is that seniors, many of whom depend on investment income to fund their retirement, will be hurt the most.

If Congress fails to act, tax rates for investment income will soar beginning Jan. 1, 2013. The top tax rate on capital gains will jump to 23.8% from 15% and the top rate on dividends will nearly triple to 43.4% from 15%. ...

Now is not the time to raise tax rates on investment income—even if limited to upper-income taxpayers. Raising taxes on dividends and capital gains will have a devastating, domino-like effect that would hurt the economic security of millions of Americans at every income level.

Given the low rates on interest-bearing investments such as certificates of deposit, many older investors have turned to dividend-paying stocks to supplement their income. ...

When Congress set the top tax rate on dividend income at 15% in 2003, it established a link between the top dividend rate and the top tax rate paid on long-term capital gains. Parity between dividend and capital gains tax rates is a critical issue—we cannot have our tax code picking winners and losers. Individual investment decisions should be driven by the markets and the performance of the companies themselves. ...

It is important to remember that if a company decides to pay dividends, the earnings already are taxed twice—first at the corporate level when the company pays taxes on its earnings (at a federal statutory rate of up to 35%), then later at the individual level when shareholders receive the dividends.

According to a study prepared this year by Ernst & Young for the Alliance for Savings and Investment, the top U.S. integrated dividend tax rate is currently 50.8% (when both corporate and individual taxes are factored in). If the current rates expire, this rate will rise to 68.6%—the highest level among developed nations. ...

With the economy still struggling, now is not the time to reduce dividend income through higher taxes. Our grass-roots advocacy campaign, Defend My Dividend, has a simple message for Congress: Keep tax rates on dividend income low and in line with the tax rates on capital gains. It's good for American businesses, good for the economy, and good for all investors—especially seniors.

Update: CBPP, Scaring Seniors on Capital Gains:

“Seniors . . . will be hurt the most” if policymakers let the tax rates on capital gains and dividends rise next year as scheduled, a Wall Street Journal op-ed today argues. This is simply false. The data clearly show that raising the rates would have little or no impact on most elderly households.

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