Obama’s Budget is Every Investor’s Worst Nightmare
By Louis Basenese, Wall Street Daily
Regardless of your political stance, if you are an investor—especially a dividend investor—you should be deeply concerned about President Obama’s proposed budget for 2013. This issue transcends politics and delves into the realm of investment realities. Read on to discover why this budget could spell trouble for investors everywhere.
Brace for Higher Taxes and Diminished Yields!
Recently, President Obama released his budget proposal for the 2013 fiscal year, which seeks to impose approximately $2 trillion in new taxes and fees, with a target focused directly on investors—particularly those who rely on dividends.
One of the most alarming aspects of the budget is the increase in the tax rate on qualified dividends, raising it from 15 percent to a staggering 39.6 percent. When considering the additional surcharge related to healthcare reforms, this rate climbs to 43.4 percent.
It’s clear that this impact on after-tax yields would be drastic. Let’s examine the extent of this potential reduction in income.
Moreover, the timing of these proposed tax hikes could not be worse…
Say Goodbye to Corporate Generosity
As you probably know, traditional saving options like money market funds, CDs, and U.S. Treasuries currently offer dismally low yields. This has driven many investors to seek higher returns, putting quality dividend stocks in the spotlight.
In response, companies have been more generous with their dividends. Since August 2009, the dividend payout ratio for the S&P 500 Index has increased by 32 percent, and this year, analysts project that total dividend payments will hit a record high of $263 billion.
However, the proposed budget threatens to halt this trend. Ironically, the government’s desire to collect a larger share of dividend income may ultimately lead to a reduction in that very income. Why is this the case? If the budget is enacted, dividends will be taxed at a higher rate than capital gains—almost 20 percentage points higher (43.4 percent compared to 23.8 percent).
In this scenario, companies may find it illogical to distribute profits as dividends, choosing instead to reinvest in their businesses to drive up share prices. This way, both the companies and their shareholders could benefit from lower tax liabilities.
As institutional equities strategist Gina Martin Adams from Wells Fargo points out, raising the tax rate on dividends above that of capital gains could lead to the “death of the dividend theme.”
This is a critical situation for investors who rely on dividend income.
Why Every American Should Take Notice
While these proposed tax increases are aimed at households earning more than $250,000 a year and individuals making over $200,000, many Americans may think they will go unaffected. This assumption is flawed.
The unintended consequences of higher dividend tax rates will have a ripple effect that all Americans are likely to feel.
As previously noted, these increased tax rates will compel companies to scale back their dividend payouts, impacting all dividend investors by reducing their income streams. Keep in mind that dividend income constitutes approximately 90 percent of total stock market returns over the long term. Consequently, the proposed budget poses a threat to the long-term financial health of all investors.
Additionally, the assertion that taxing the wealthiest Americans is merely a matter of fairness is misleading.
Currently, White House Press Secretary Jay Carney argues that these tax proposals are simply asking those who have prospered in recent years to contribute a bit more. This reasoning oversimplifies a complex issue. Remember, once these tax increases are established for the wealthy, it becomes much easier to extend similar measures to the broader population in the future.
In conclusion, this situation is not about class warfare or partisan politics. The President’s budget threatens to adversely impact all investors’ returns. It’s crucial to voice your concerns in our democratic system before it’s too late.
Sincerely,
Louis Basenese
for Economic Prism
[Editor’s Note: Louis Basenese is Co-Founder and Chief Investment Strategist for Wall Street Daily. He specializes in technology and small-cap stocks and is also knowledgeable in special situations, including mergers & acquisitions and spin-offs.]
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