Originally published by Politic365 here.
Hidden deep within the depths of Obama’s record-breaking 2013 budget proposal is a tax increase shifting our economic burden to wealthy Americans, but carrying the unintended side effect of limiting the incomes of all Americans . . . especially seniors.
We’ve all heard Warren Buffett harangue our legislators for allowing his tax rate to remain lower than that of his secretary. Most Republicans agree that lower tax rates on investments are good for the economy. But, Democrats have shown their contention for such policies by introducing legislation to take Warren Buffett’s excessive income, along with everyone who earns over $200,000 or so per year.
Obama’s new budget proposal takes it to a whole new level, nearly tripling the tax rate on corporate dividends. (For those of you who are deeply concerned about Warren’s welfare, don’t worry. He will shift his income to other sources, if this affects him at all.)
In order to do so, Obama proposes raising the dividend tax rate to match that of next year’s top personal income rate of 40%. By itself, that would equal a rate 166% higher than the current one.
However, according to the Wall Street Journal, if you include the expected phased-out tax deductions and a 3.8% ObamaCare surcharge that is due to take effect at the same time, those rates will further increase to 45%, three times the current dividend tax rate.
Republicans have two serious concerns with this proposal. First, the funds that companies pay in dividends have already been taxed at the corporate rate, leading to a situation of double taxation.
Second, the increase in taxes is going to place a significant burden on seniors who depend on this income for retirement.
As corporations earn revenues, they have to contribute their share to the government’s budget just like you and me. Whatever is left after all their taxes is called “retained earnings” in the accounting world and a company can either reinvest those dollars or choose to pay them out in the form of dividends to its investors. Combining the 35% corporate tax rate with the current 15% dividend rate, the final amount of money that reaches a private citizen’s hands is only 55% of the amount it started as. Under Obama’s new plan, the government will take a 65% cut before it reaches that same end-user. With costs-of-living increasing, that’s a fairly substantial pay cut for someone who may depend, even in part, upon those dollars as income.
As a comparison, Belgium, the country with the highest personal income tax rate in the world, would allow someone as poor as, say, Warren Buffett’s secretary to take home the same amount Obama is proposing.
As the White House continues to claim that these taxes will only close the gap between wealthy earners and the rest of society, the truth is most retirees and seniors will have to take drastic cuts in their personal incomes, increasing the reliance upon an already troubled social security system.
According to IRS records, 75% of current dividend payments go to those older than 55. Fifty percent of dividends are received by seniors aged 65 and over. Although it’s clear that this demographic will see stark cuts in their retirement income, all shareholders, including some of Obama’s biggest supporters (teachers unions, labor unions, and government employees all have pensions), will see an impact.
Aside from the obvious decrease in the direct income that is paid out in cash, when dividend taxes increase, the value of a stock decreases. Without getting into how stock values are calculated (if you haven’t studied finance, “the present value of future income streams” may be harder to understand than an inebriated Gary Busey) but let’s suffice it to say that they are calculated on an after-tax basis. As taxes increase the value of a stock will decrease, further decreasing the value of retirees’ portfolios. Savvy investors will try to beat the expected drop in stock prices by selling out early, further depressing values for those of us without a full time gig studying Bollinger Bands and artificial neural networks.
According to a Gallup poll, the percentage of Americans who now own some form of stock investments has dropped from 65% in 2007 to 54% today, a trend that is already increasing wealth disparities as well as a reduction in capital available to businesses for re-investment at alarming rates. If Obama’s new policy is enacted, it will only further instigate this trend, and we only need look at the history of the last two decades to see evidence of this.
Throughout the 90s, dividend tax rates were nearly double the capital gains rate. Although there is some debate about whether or not disparate tax rates that force businesses to shift shareholder earnings from dividends to business reinvestment are detrimental to our economy, the resulting dramatic swing in the opposite direction that followed the dividend rate cut of 2003 proves that dividend payouts are highly sensitive to tax rates. In the several years after the tax cuts, dividend payouts nearly tripled.
Much like today, a trend emerged, especially after the economic uncertainty and fallout from 9/11, for companies to sit on their cash instead of pay it out to their shareholders. When the cuts provided the proper incentive for companies to reverse those trends, seniors and pensioners relying on this income benefited.
But now the political winds are blowing in a different direction and the Administration’s intent to bring more “fairness” to our economy is carrying with it a result that may have unintended political consequences.
We’ve all seen the political fallout, protests, and outright nastiness that can ensue when social security benefits are even discussed around those on a fixed income. Although it’s true that there is probably no chance this budget will even see the light of day, one has to wonder if Obama is making an election year statement that he is not just after wealthy people’s money, but everyone’s.
JUSTIN VELEZ-HAGAN is a Senior Contributing Writer and Commentator for Politic365.com. He is also the National Executive Director of The National Puerto Rican Chamber of Commerce and an international developer of senior living facilities. He can be reached at Justin@Politic365.com.