Obama Dividend Tax Would Devastate Retirees

Buried within President Barack Obama’s 2013 budget is a proposal to triple the tax rate on corporate dividends which now stands at 15 percent, a move that would have a severe effect on retirees, " target=_blank>The Wall Street Journal notes in an editorial.

Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6 percent, according to the Journal. The rate jumps to 41 percent with the planned phase-out of deductions and exemptions and then hits 44.8 percent with the 3.8 percent investment tax surcharge in Obamacare.

“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 Journal wrote.

“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 percent in 2003, dividends reported on tax returns nearly doubled to $196 billion from $103 billion the year before the tax cut, and by 2006, dividend income had grown to nearly $337 billion, The Journal wrote. Economists who examined dividend payouts came to the conclusion that the tax cut played a significant role in the increase in dividend payouts.

“If you reverse the policy, you reverse the incentives,” the Journal wrote. “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.”

The Journal concluded that “all American shareholders would lose” as the taxes would make stocks less valuable and prices would fall, causing a sell-off and noting that 51 percent of adults hold shares of stock today either directly or through mutual funds.

“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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