About the Issue

In December 2010, 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, including a reduction in the maximum tax rate for capital gains and dividends. However, absent additional Congressional action, these tax rates will automatically increase dramatically on January 1, 2013. Capital gains tax rates would increase by as much as 33 percent. For dividends, the increase is even worse, with tax rates for many individuals increasing by nearly 164 percent. And these increases do not even include the recently passed 3.8 percent Medicare health insurance tax that will apply to certain investors in 2013. Medicare tax hikes will raise $210 billion between 2013 and 2019.  Learn more »

With regards to the potential capital gains and dividends tax hikes, ASI supports the following:

• Maintaining the existing differential rate for capital gains and dividends taxes for all taxpayers before an automatic increase is enacted in January 2013.
• Making permanent the differential tax rates on capital gains and dividends in order to provide certainty to investors and stability to the economy.
• Making permanent the relationship between capital gains and dividends taxes and their differential status.

If you are currently collecting a dividend, a $1 qualified dividend nets you $0.85 after taxes. If Congress does not act before January 2013, that same $1 dividend would only net some taxpayers $0.615. And in January 2013, they would only receive $0.58 because of the Medicare tax.

On capital gains, an investor that collects $1 in capital gains currently receives $0.85 after taxes. In 2011 that investor would receive just $0.80 on the same $1 earned. By 2013 the take home would be reduced further to $0.76.

Raising taxes on capital gains and dividends would discourage Americans from saving and investing at exactly the wrong time. 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.

• Job Loss—One study estimates that the economy could lose up to 270,000 jobs in 2011 as a result of the tax hike.
• 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.” Dr. Romer’s conclusions are reflected in the President’s proposed budget, which preserves differential tax rates for capital gains and dividends for all taxpayers.

• 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.
• Investors at all income levels would be harmed—If Congress chooses to extend the current dividend tax rates for individuals making less than $200,000 and households making less than $250,000, but allows the current rates to expire for individuals and households above those thresholds, the net effect would still be a marked decrease in the total amount of dividends paid by corporations. This overall decline would not just hit the wealthy; rather, it would hit all investors that rely on dividends.

• Seniors earn a disproportionate amount of the dividend income—A January 2010 study done 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.