The Fiscal Cliff: Dividend Tax Increases

David Williams

December 3, 2012

As policy makers continue to discuss tax and spending priorities to avert going over the “fiscal cliff”, one issue that has not gotten as much attention as it should have is the tax hike on dividends.    According to The Wall Street Journal, “Now capped at 15%, the top rate is slated to rise to 39.6%, and the wealthy will see a 3.8% Medicare surtax on top of that.”   The dividend tax issue is one that should be front and center because a tax increase on dividends could affect a number of people’s interests including seniors, investors and businesses.  In fact, the tax can even be seen as regressive in some situations and a recent analysis by The Tax Foundation found that lower income seniors rely on dividend income even more than higher income seniors.  See the table below for their analysis.

Table 1. Importance of Dividends and Capital Gains for Seniors 65 and over, by Income

Income

Senior Taxpayers Age 65 and over Who Claim Some Dividend Income

Percentage of Income from Dividends

Percentage of Income from Capital Gains

$0 – $29,999

11.3%

0.6%

$30,000 – $49,999

13.8%

4.2%

$50,000 – $99,999

7.2%

8.3%

$100,000 and over

7.7%

16.6%

In addition, a Heritage Foundation analysis regarding dividend tax increases shows, “[a] higher tax rate on dividend income will affect more than just decisions of companies. Senior citizens disproportionately hold dividend-paying stocks, with almost half of all tax filers ages 65 or older reporting dividend income. These seniors will have lower incomes and consume less due to lower payouts.  Congress should extend the tax relief to maintain a low tax rate on dividends in order to maximize economic growth, prevent inequities in the tax code, and not penalize seniors.”

Aside from affecting seniors, an increase in the dividend tax rate would also affect companies that pay dividends.  As Defend my Dividend, a website devoted to the dividend tax issue noted, “Raising tax rates on dividends—even for high-income taxpayers only—would create a disadvantage for dividend-paying companies and may cause companies to alter their current dividend strategies. This has the potential to lower the dollar amount (percentage rate) by which companies ordinarily increase their dividends and could reduce the stock value for all shareholders. If this happens, all taxpayers who receive dividends would be affected, regardless of their income level, by discouraging investment in dividend-paying companies and potentially lowering dividend payouts.”  Aside from lowering payouts, a dividend tax increase would have an effect of business making decisions of managers.  As 18 CEOs noted in a letter to the Obama Administration (as reported by Politico), an increase on dividend rates would, “limit corporations’ ability to raise new capital and will undermine economic growth.

As we have seen, an increase on the dividend tax rate could have disastrous effects on our economy at a time with only meager economic growth.   Policy makers should be looking at ways to cut spending in a responsible and meaningful way, instead of looking for revenue in places that will effect growth of business and financial security of seniors.