When You Think Increased Taxes On The Rich Will Benefit You, Think Again….

I can’t help but laugh when told the maximum individual tax rate is 35%.  Most out there don’t know that as your income increases you begin to lose deductions, so the increase in what you pay is camouflaged by, not an increase in rate, but an increase in the amount that rate is calculated against.  I’m for a flat tax, which is the only way voters won’t be influenced to vote for one who’d give their socio-economic class preference.  The rich wouldn’t support a particular politician, for the wrong reason, nor would the not-so-rich.  As you read the excellent article below, remember that dividend income is not only applicable to those who individually invest in the stock market, but also those who are teachers who have a retirement fund investing in the market, or union members who’s retirement funds are so invested, and on and on.  Corporate taxes of all kinds effect all Americans…after all, the consumer is where the burden of government stops.  All costs are passed on to those who buy a new car, or a loaf of bread.  Tax the man who owns the bakery higher, and he merely passes his costs along to the consumer.

 

Obama’s Dividend Assault

FEBRUARY 22, 2012 REVIEW & OUTLOOK

A plan to triple the tax rate would hurt all shareholders.

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. Dividends fell out of favor in the 1990s when the dividend tax rate

was roughly twice the rate of capital gains.

 

When the rate fell to 15% on January 1, 2003, dividends reported on tax returns nearly doubled to $196

billion from $103 billion the year before the tax cut. By 2006 dividend income had grown to nearly $337

billion, more than three times the pre-tax cut level. The nearby chart shows the trend.

 

Shortly after the rate cut, Microsoft, which had never paid a dividend, distributed $32 billion of its retained

earnings in a special dividend of $3 per share. According to a Cato Institute study, 22 S&P 500

companies that didn’t pay dividends before the tax cut began paying them in 2003 and 2004.

 

As former Citigroup CEO Sandy Weill explained at the time: “The recent change in the tax law levels the

playing field between dividends and share repurchases as a means to return capital to shareholders. This

substantial increase in our dividend will be part of our effort to reallocate capital to dividends and reduce

share repurchases.”

 

And that’s what happened. An American Economic Association study by University of California at

Berkeley economists Raj Chetty and Emmanuel Saez examined dividend payouts by firms and concluded

that “the tax reform played a significant role in the [2003 and 2004] increase in dividend payouts.” They

also found that the incentive for firms to pay dividends rather than sit on cash helped “reshuffle” capital

from lower growth firms to “ventures with greater expected value,” thus increasing capital-market

efficiency.

 

If you reverse the policy, you reverse the incentives. The tripling of the dividend tax will have a

dampening effect on these payments.

 

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?

 

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

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