The Homa Files

Appropriately, much attention is starting to get focused on the likely TRIPLING of the marginal tax rate on dividends (see the WSJ article below). 

Right now, the top rate on ordinary dividends is 15%.  The current Senate budget resolution calls for the rate to jump on January 1 to the pre-Bush ordinary income tax rate of 39.6%.  In 2013 — when the ObamaCare tax collection mechanism gets revved up — you can add another 3.8%, pushing the high marginal rate up to a whopping 43.4%

That’s for rich folks.  But what about the widows, orphans, and retirees?

Many folks don’t realize that the current 15% dividend tax rate only applies to folks in the upper tax brackets — starting, for married folks, at $67,800.  Married folks below that threshold are in the zero, 10% or 15% marginal tax brackets — their current tax rate on ordinary dividends is ZERO !  That’s right, ZERO.

So, if their dividend tax rate for low-earners also gets upped to their ordinary income tax rates, most of them will be paying 15%.  Statistically speaking, that’s significantly different from zero.

Going after the dividend receiving fixed income retirees … hmmm… I think they call that an unintended conseuence.

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Excerpted from WSJ: The Dividend Tax Bill Arrives, April 29, 2010

As the big tax increase day of January 1, 2011 approaches, the Democrats running Congress are beginning to lay out their priorities. Get ready for bigger rate increases than previously advertised.

Last week the Senate Budget Committee passed a fiscal 2011 budget resolution that includes an increase in the top tax rate on dividends to 39.6% from the current 15% — a 164% increase. This blows past the 20% rate that President Obama proposed in his 2011 budget and which his economic advisers promised on these pages in 2008.

(See “The Obama Tax Plan,” August 14, 2008, by Jason Furman and Austan Goolsbee: “The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate.”)

And that’s only for starters. The recent health-care bill includes a 3.8% surcharge on all investment income, including dividends, beginning in 2013. This would nearly triple the top dividend rate to 43.4% in Mr. Obama’s four years as President. We suppose the White House would call this another great victory for income equality.

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Dividends which are payouts from business earnings are already taxed once at the corporate rate of 35%. The individual dividend tax is a second levy on that same income, and at a rate of 43.4% would take the total tax on each dollar paid in dividends to something like 60 cents.

You can expect fewer businesses either to offer or increase dividend payouts, which means less dividend revenue for the government.

The punitive tax rate on dividends combined with the deductibility of interest on borrowing also increases the tax code’s bias toward debt over equity. But aren’t we supposed to be living in a new era of healthy deleveraging?

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Full article:
http://online.wsj.com/article/SB10001424052748703709804575202481173165478.html?mod=djemEditorialPage_h

This entry was posted on May 6, 2010 at 7:55 am and is filed under Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.