Friday, February 24, 2012

Taxes on Dividends: A Very Bad Idea Is in the News Again

I just read an article about Obama's new proposed tax rates.  I will be paying 43.4% Federal + 5% State & Local = 48.4% on interest & dividends.  God helps us!

This is just one of scores of emails we have received from clients regarding President Obama's recent announcement of his proposal for new taxes on dividends.  If Obama's plan comes to pass, it would mean taxes would rise by 2.5 times their current level. (From about 20% for Indiana residents to nearly 50%).

The above email was short and to the point.  Here was my answer: "Fear not. This does not have a chance of passing the present Congress. It's pure politics."  My reason for such a short response was not as a time saver or to be flip, it was to state the obvious.  We already have ample evidence of failed attempts by President Obama seeking to raise taxes on the rich.  Republicans in the House of Representatives have blocked all tax hike attempts from the president, even if it meant shutting down the government.  I can see no reason why they would suddenly change now.

I also disagree with a recent Wall Street Journal article entitled "Obama's Dividend Assault," suggesting that the entire stock market would come under pressure if the tax hikes were to be enacted.  That just will not happen.  You only have to go back and look at what happened prior to and after President George W. Bush pushed through the dividend tax cuts of 2003.   Dividend-paying stocks acted no differently from non-dividend payers immediately prior to or after the cuts.  The reason for this is simple, as much as 70% of all stocks are held by non-taxable accounts such as retirement plans, foundations, life insurance, annuities, trusts, and mutual funds that have the ability to manage taxes.      

We have been talking about the potential for a hike in taxes on dividends ever since President Obama took office. That is because President Clinton dramatically raised taxes shortly after he took office.  It is important to remember that Clinton's plan taxed dividends about the same as President Obama is now proposing.  We figured he would get around to attacking dividends sooner or later.

My own personal view and that of our Investment Policy Committee is that it is far too early to make changes based on something that might happen. Indeed, as we understand it, the tax increases would only affect individuals with adjusted gross income of $200,000 and joint filers with $250,000.  For people above those levels we have other strategies to diminish the impact of taxes. 

We will have much more to say about Obama's proposed tax hikes in the weeks and months ahead.  We wanted to get out our early thoughts on all the buzz surrounding the hikes.  We have traveled this road before when President Clinton hiked taxes dramatically on dividends. We lived through that, I am confident we will make it through whatever providence places before us.