The imminent tax increases, particularly the proposed hike on dividend income, are causing significant concern among investors. Since 2003, the maximum tax rate on dividends has stood at 15 percent. However, under President Obama’s proposed plan, dividends would be taxed at ordinary income rates, resulting in top earners facing a tax rate of 39.6 percent on their stock dividends.
This shift comes at a time when dividends are crucial for effective capital management and preservation. The Federal Reserve’s policies of maintaining zero interest rates and quantitative easing have driven yields on the 10-Year Treasury Note down to just 1.61 percent, which is even lower than the inflation rate reported by the Bureau of Labor Statistics. Consequently, investing in government debt becomes a certain way to diminish wealth.
As a result, high-yield dividend stocks have become vital for those saving and investing for retirement. Unfortunately, President Obama’s approach threatens to undermine this reliable income source—leaving many to wonder why such drastic measures are necessary.
When combining the anticipated revenue from the proposed tax increase on dividends with the expected rise in capital gains tax—from 15 to 20 percent—the government estimates it could secure approximately $240 billion over the next decade. This translates to about $24 billion annually, which, shockingly, would cover federal spending for just 2.3 days each year.
Clearly, raising taxes on dividends and capital gains serves more as a political maneuver—an attempt to target the affluent—rather than a legitimate strategy to address the national debt. Furthermore, the projected $240 billion in tax revenue from investors over the next ten years obscures a larger picture of adverse economic consequences.
Secondary Consequences
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups,” stated Henry Hazlitt in his renowned book, Economics In One Lesson. Hazlitt emphasizes that economic policies yield long-term and indirect consequences, often overlooked by decision-makers.
While a particular policy might benefit a specific group, it may have adverse effects on others that are ignored. Policies concerning taxation, tariffs, minimum wage laws, and various kinds of market interventions frequently lead to unintended repercussions that can outweigh any perceived benefits.
President Obama and his advisors view investors as a source of funds they can appropriate for their own agendas. However, they fail to recognize the opportunities and potential innovations that the seized funds might have fostered, should they have remained in the hands of investors. Their policies disrupt the free market and hinder the efficient allocation of resources.
Increasing taxes on dividends and capital gains hampers both individuals’ and businesses’ capacity to generate and accumulate capital. This, in turn, restricts capital from being effectively utilized within the economy, ultimately throttling economic growth and the creation of jobs.
A common practice among dividend investors involves reinvesting their dividends back into stock. This strategy is a reliable method for gradually building wealth over time, which consequently enhances a company’s market capitalization.
Economic Reduction
When a company possesses greater capital, it can expand its operations, establish new manufacturing plants, and invest in cutting-edge technologies. This growth can lead to job creation and lower product prices, demonstrating how capitalism can enhance wealth for everyone.
It’s nearly inconceivable to grasp the wealth and innovation we forfeit due to heavy government intervention in capital markets. The potential opportunities remain unknown. There’s also a moral dimension to consider…
When an investor acquires a share of stock, they assume the risk of losing their entire investment. The government does not provide compensation for losses. Yet, should the investor profit through dividends, President Obama proposes that only 60.4 percent of this profit be retained, with the remainder confiscated by taxes.
This raises ethical concerns. Moreover, aside from the positive societal impacts of reinvesting dividends, there are numerous other avenues through which this taxation policy could reduce overall economic vitality.
If the investor opts not to reinvest the dividend and instead deposits it in a bank, it bolsters the bank’s assets, enabling more loans to small businesses and homebuyers, stimulating economic growth. Alternatively, should the investor spend the dividend locally—perhaps on breakfast or a new suit—it generates income for local businesses, fueling the economy.
However, such economic activities may never materialize, as these funds have already been allocated by Washington for questionable ventures, including everything from doggie shampoo to seminars on intergalactic agriculture.
Sincerely,
MN Gordon
for Economic Prism
