President Obama seems intent on refocusing the debate away from the Affordable Care Act (ObamaCare) and away from Fast & Furious (that’s still kicking around, right?) and away from job numbers that aren’t even keeping pace with population growth and putting the spotlight on taxes. One might argue that the looming tax hikes coming at the end of the year are a danger to the economy – although President Obama in the past said that tax cuts will not help the economy.
President Obama is going to walk a fine line here. He will assure everyone that all he wants to do is raise taxes on those earning above $250,000. He doesn’t really identify why he chose that number and not $300,000 or $500,000. Maybe he took some percentage of the population. Estimates mark the percentage of taxpayers affected by this arbitrary line at 2.6% of taxpayers in 2013. Now there are various camps in the Democrat party that want that line at $1 Million, but who knows what will finally fall out. Regardless, the meme will be the same: only the rich will be getting a “tax hike”. Right?
Well, not exactly. When you compare what would happen if the tax cuts expire, Obama’s budget plan and Romney’s proposals to date and you include dividend rates, capital gains, and estate taxes the bigger picture becomes more clear:
|Top Dividend Tax rate||15%||43.4%*||43.4%*||15%|
|Top Capital Gains Tax rate||15%||23.8%*||30%||15%|
|Estate Tax rate||35%||55%||45%||0%|
* – it is worth noting that the dividend tax rates for 2013 and Obama’s plans and the capital gains taxes for 2013 all include the 3.8% investment tax that is part of the ACA
Read those numbers carefully. If Obama gets his way, taxes are GOING UP. Period. Sure, he can dance around that federal income taxes for the rich went up…but he will mislead through omission. He will RAISE the estate tax rate by 10% over what it is now and he will RAISE the top capital gains tax rate by 15% over where is current stands and 6.2% higher than where it would reach if the tax cuts just expire. Finally, he will allow dividend tax rates to RISE by 28.4% over where they are today. Do NOT be deceived. He is planning on raising taxes.
Some of these increases are progressive and we may not know the full extent of Obama’s plan but let’s consider the dividend tax rate for a moment. When a company makes a profit, depending on its structure and financial strategy, it may offer a dividend to its shareholders. First, the company pays corporate taxes – 35% at the top, various plans to cut it to 28% or lower are kicking around between the various candidates. Then as the shareholder gets it – maybe that kind old lady down the street who invested in the company years and years ago and maybe to the many who have shares as part of a 401k plan and yes, maybe Warren Buffet, the Koch Brothers, and Bill Gates – they will pay a dividend tax. So right there, the government has decided that it’s worth taxing the profit twice. Money managers fear this increase for a number of reasons:
1. Dividend yielding stocks are usually a solid investment during volatile market times (ahem, like now). Many blue-chip companies provide significant dividends. For example, Coca-Cole just raised its dividend for the 50th straight year.
2. Taxes are punitive in nature – look at how governments have recently applied them to cigarettes, bags at retail stores, etc. So an increase in the dividend taxes will make them less attractive of an investment. This causes two issues: (a) less investment in the companies issuing dividends – a situation we don’t need now and (b) more market volatility as investors trade more to attempt to make up for the loss in dividend revenue.
3. In 2008, the IRS reported that retirees (Americans over 65) accounted for 42% of the dividend income. So who is this increase in dividend taxes aimed at hurting? The rich? How about the retirees. And guess what? I’d guess that number will be greater in 2012 solely due to the population numbers: we have large numbers of the Baby Boomer generation retiring.