About the Issue
In January 2013, President Obama joined with a bipartisan majority of the U.S. Congress to enact legislation to spur economic recovery, create jobs, and extend critical tax relief to millions of Americans. This legislation established a permanent link between the tax rates for capital gains and qualified dividends with a maximum tax rate of 15 percent for individuals earning less than $400,000 each year and joint filers earning $450,000 each year. For individuals and joint filers above those thresholds, the legislation set a maximum rate of 20 percent for capital gains and dividends. Learn more »
Higher taxes on capital gains and dividends would discourage Americans from saving and investing. A tax penalty for investing in American corporations would drive investment dollars away, depriving businesses of the capital they need to grow thus stifling our nation’s economic recovery.
- Slow economic growth—President Obama’s top economic advisors agree; Dr. Christina Romer, former Chair of President Obama’s Council of Economic Advisors, concluded in a November 2006 study that “tax increases are highly contractionary” and that “the large effect stems in considerable part from a powerful negative effect of tax increases on investment.”
- Fewer companies would pay dividends—Higher tax rates for dividends provide a disincentive for corporations to distribute profits to shareholders, while lower rates encourage more companies to pay out.
- Companies would pay out smaller dividends—A study by the Cato Institute found that 19 companies in the S&P 500 began paying dividends for the first time in the immediate aftermath of the tax reform enacted by Congress in 2003. And annual dividends paid by S&P 500 companies rose from $146 billion to $172 billion.
- Seniors earn a disproportionate amount of the dividend income—A January 2010 study by Ernst & Young found that of the 27.1 million Americans who received a dividend from utility companies in 2007 61 percent were from taxpayers age 50 and older and 30 percent were from taxpayers age 65 and older.
- Seniors rely on dividends to make ends meet—Millions of older Americans rely heavily on income from investments to supplement their fixed retirement benefits. According to the Investment Company Institute, more than half of older investors cite current income as their principal reason for investing. Many of these retirees earned these investments through years of hard work, opting to receive company stock as part of their compensation. They took pride in their work and wanted to own a piece of the company they worked for – these investments often form the bedrock of their life savings.
- Weaken Retirement Accounts—Studies have found that raising taxes on investment income could depresses the value of stocks held in various retirement savings plans, doubling the damage done to seniors.
- Less Management/Shareholder Alignment —Dividends are an important tool aligning the interests of management and shareholders.
- Less Transparency—Dividends serve an important corporate governance function—companies must have cash from real (not paper) profits in order to pay dividends to shareholders. Dividend payments are the ultimate form of accounting transparency.
- More Debt Financing—High tax rates on dividends can reduce the perceived value of a company's stock and encourage it to raise capital through debt, since interest on debt is a deductible corporate expense for tax purposes and dividends are not.