Obama's Dividend Assault (A plan to triple the tax rate would hurt all shareholders. You included)

Wall Street Journal ^ | 02/22/2012

[SeekAndFind]

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.

[SeekAndFind]

TAKE NOTE:

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.

MAKE NO MISTAKE, THERE WILL BE COLLATERAL DAMAGE IF OBAMA’s PLAN IS ENACTED INTO LAW.

And those of you who invest in dividend paying companies ( either directly or via your 401K) WILL BE AFFECTED !!

[InterceptPoint]

Money earned by corporations and paid out as dividends reduces the value of the underlying stock. If you raise the tax rate on dividends then companies will simply stop paying dividends, their stock will be that much higher and people will sell a small portion of their stock and pay capital gains rates. The net result will be a reduction in government tax revenue.

[taildragger]

I will also argue to the go-go tech boom was probably funded by this disparity in Cap Gains vs. Dividends. We can thank Bill Clinton and Newt for that one, to be honest. Without getting into the particulars I got to see it 1st hand in a professional capacity what it did to portfolios and taxes.

The only respite from this Obama dividend fiasco maybe Roth IRA's but you have to below 170k to make that work, or does he mess with the "Roth" as well?

[EyeGuy]

Bluntly:

More racist raiding of the assets and savings inclinations of fiscally responsible whites.

[SeekAndFind]

[SueRae]

Always watchthe other hand.. Was there ever any doubt. January is going to be painful. Bush tax cuts expire, raise the dividend, throw 0bamacare and fuel prices in. Yep, some recovery. I just know it isn’t ours. This is what he wants.

Either he goes or I do. And I fear that there are a lot of voters out there who’s arithmentic is on par with their judgement. We’re in trouble.

[Skepolitic]

If you think your Roth is safe from future taxation under this regime, you ought to think again.

There are all sorts of things Obama and Congress can do to get your Roth money without directly taxing its distributions. Congress is actively considering forcing beneficiaries of inherited Roth IRAs to take immediate distributions, which would eliminate much of the Roth’s tax avoidance potential. A few years back Congress held hearings to discuss conversion of all individual retirement accounts into government annuities. And we all know that Social Security benefits will eventually determined by some sort of means-testing formula. Roth IRA balances and distributions could easily be incorporated in that formula, which would be the equivalent of a tax without it being an explicit tax.