One tax hike set to take effect January 1, 2011 unless Congressional action is taken is a 164 percent increase in the tax on dividends. This would raise the top tax rate from 15 percent to 39.6 percent, stifling economic growth and slashing the value of retirement plans and other investments.
These taxes are not paid only by the superrich. A study by Ernst & Young found 65 percent of the 27.1 million tax returns in 2007 that reported dividend income showed total incomes of less than $100,000. Senior citizens would be disproportionately affected by this tax hike because they make up the majority of dividend taxpayers.
Raising the dividend tax also would affect the retirement investments of middle-income Americans, because a sizeable amount of investment earnings of 401k plans, stocks, and pension plans are derived from dividends. In particular, dividend-paying stocks such as utilities would become significantly less attractive, harming both stockholders and workers.
Constantly changing tax rates and creating uncertainty in the tax code hinders economic growth by taking money out of the economy. Dividends already face double taxation, initially taxed as corporate profits and then as income for shareholders. Making the current lower tax rates permanent, or at least extending them for several years, will make businesses and investors more apt to invest and keep more of their capital working in the market, helping to spur economic growth.
The following articles and studies offer additional information on dividend taxes.
Economic Effects of Increasing the Tax Rates on Capital Gains and Dividends
The Heritage Foundation finds that rolling back the 2003 tax cuts on capital gains and dividends would slow economic growth: “The slower economy causes employment to shrink by 270,000 job in 2011 and 413,000 in 2018. Similar job losses continue for the next seven years of our model’s forecast horizon of 2008 through 2018.”
Last Thing Economy Needs Is 164% Dividend Tax Hike
Terry Savage, a nationally known expert on personal finance, markets, and the economy, warns against letting the tax rate on dividends increase: “Yes, it’s tempting to say that we need to reduce the deficit, but imposing a tax on capital is a very expensive and counterproductive way to do that.”
The Beneficiaries of the Dividend Tax Rate Reduction
This study, prepared by Ernst & Young LLP for the Edison Electric Institute and the American Gas Association, identifies who has benefited from the 2003 cut in the dividends tax rate. The study finds, “Based on our analyses of all shareholders, the percentages of tax returns with qualified dividends have the following profile: 61 percent are from taxpayers age 50 and older, 30 percent are from taxpayers age 65 and older, 65 percent are from returns with incomes less than $100,000, and 36 percent are from returns with incomes less than $50,000.”
Show Me the Money! Dividend Payouts after the Bush Tax Cut
In this Cato Institute briefing paper Stephen Moore and Phil Kerpen look at what effect the cut in the dividend tax rate had on dividend payouts. After the tax cut went into effect, they find, “dividends increased 18 percent without special dividends and 23 percent with special dividends.”
Higher Taxes on Dividends Will Discourage Investment and Retard Economic Recovery
Dr. Bernard Weinstein, associate director of the Maguire Energy Institute and adjunct professor of business economics in the Cox School of Business at Southern Methodist University in Dallas, identifies how allowing the dividends tax rate to increase will hurt the economy. “As the nation struggles to rebound from the worst economic downturn since the Great Depression, now is not the time to enact policies that will discourage new capital outlays,” he concludes.
The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study
This National Bureau of Economic Research working paper analyzes the effect the dividends tax cut had on investment values. The paper finds “strong evidence that the 2003 change in the dividend tax law had a significant impact on equity markets.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at http://heartland.org and Budget & Tax News at http://www.budgetandtax-news.org.
If you have any questions about this issue or The Heartland Institute, you may contact Legislative Specialist John Nothdurft at [email protected], 312/377-4000.