Tags: Obama | Triple | Dividend | Taxes

WSJ: Obama Proposal to Triple Dividend Taxes Will Hurt Elderly

Wednesday, 22 Feb 2012 08:20 AM

President Barack Obama's proposal to raise the dividend tax rate from 15 percent to the higher personal income tax rate of 39.6 percent that will kick in next year will effectively triple taxes on dividends, the Wall Street Journal reports.

Add to this the planned phase-out of deductions and exemptions and the 3.8 percent investment tax surcharge in Obamacare, and the new dividend tax rate in 2013 would be 44.8 percent — nearly three times today's rate.

The question is how this helps anyone. According to the Investment Company Institute, about 51 percent 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?

Dividends are paid to shareholders only after the corporation pays taxes on its profits. Given a maximum 35 percent corporate tax rate and a 44.8 percent dividend tax, the total tax on corporate earnings distributed as dividends would be 64.1 percent.

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.

Historical evidence 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 percent 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.

Moreover, a Cato Institute study shows that 22 S&P 500 companies that didn't pay dividends before the tax cut began paying them in 2003 and 2004 — including Microsoft, which distributed $32 billion of its retained earnings in a special dividend of $3 per share.

CNBC reports that analysts at Standard and Poor's expect the dividend payout for the S&P 500 to surpass the record $247.9 billion paid out in 2008, and that the total dollar amount by S&P 500 companies could reach a record high this year.

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