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Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

 
Best of Howard Ruff
March 19,2012
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POLITICAL ECONOMICS: WILL IT BACKFIRE?

(What happens in Washington?  will affect your pocketbook)

Obama's 2013 budget is full of buried treasures. One is his proposal to triple the tax rate on
corporate dividends. His budget proposes to raise the dividend tax rate on “the rich” to 39.6% and it will eventually hit 41%. There would be an added 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be about 44%  — almost three times today's 15% rate.

Remember, dividends are paid to shareholders only after the corporation pays taxes on its profits.
So assuming a maximum 35% corporate tax rate and a 44% dividend tax, the total tax on corporate earnings passed through as dividends will be over 60%.

In previous budgets, Obama proposed about a 24% increase on both dividends and capital gains,
which is roughly a 60% increase of the tax on investments. At least it would be more in line with
the tax on capital gains and dividends established by George W. Bush is 2003. The White House wants us to think this new rate would apply only to the filthy rich who make $200,000 a year or $250,000 for greedy couples. With sleight of hand, Obama has convinced us that a couple making $250,000 is rich, but as inflation heats up, it will become chump change.

And of course, that’s not the whole story.  Shareholders of all incomes will become collateral damage and get to share the pain.  Historically corporate dividend payouts are very sensitive to the dividend tax.  Back in the 1990, dividends fell out of favor when the dividend tax rate was almost twice the rate of capital gains.

When the rate fell to 15% in January of 2003, dividends reported on tax returns nearly  doubled to $196 billion from $103 billion the year before.  Bu 2006, dividend income grew to nearly $337 billion, more than three times the pre-tax cut level.  Shortly after the rate cut, over 20 S&P 500 companies that had never paid dividends began paying them in 2003 and 2004.  The chart below shows the trend

Former Citigroup CEO Sandy Weill explained at the time: "The recent change in the tax law levels the playing field between dividends and share repurchases as a means to return capital to shareholders. This substantial increase in our dividend will be part of our effort to reallocate
capital to dividends and reduce share repurchases." 

The 2003 tax reform obviously increased dividend payouts. It was an incentive for business to pay dividends rather than sit on cash, increasing overall capital-market efficiency. If the policy is
reversed, it will also reverse incentives. Tripling the dividend tax will definitely put a damper on dividends.

Retirees and near-retirees will be hit the hardest because they depend on dividend income. Almost three of four dividend payments go to those over of 55, and more than half go to those older than 65.
But everyone would lose. Higher dividend and capital gains taxes make stocks less valuable, so stock prices would fall to adjust to the new after-tax rate of return. If investors become convinced later this year that dividend and capital gains taxes are going up on January 1, they are likely to sell shares rather than paying the higher rates.

How does this help anyone? About 51% of adults own stock directly or through mutual funds, which is more than 100 million shareholders. Tens of millions more own stocks through pension funds. Obama’s goal is to punish “the rich,” bit this policy would affect millions of American families making far less than $250,000.  Has his plan backfired? Or was it the real plan all along.