Dividend Tax Rates

Background:

The American Tax Relief Act of 2012 (ATRA) maintained the low tax rates on dividends that are at parity with the tax rates on capital gains. If Congress had not acted, the top rate on dividends would have more than doubled from 15 percent to 39.6 percent. Instead, ATRA set the top rate for both dividends and capital gains at 20 percent for couples earning more than $450,000 while maintaining the lower rates for taxpayers below those income thresholds.

Unfortunately, in President Obama’s fiscal year 2016 budget proposal the top dividend tax rate would increase from 20 percent to 24.2 percent. After factoring in the 3.8 percent Affordable Care Act investment surtax, the effective top dividend tax rate would actually be 28 percent.

Issue:

Raising taxes on investment is out of step with the global economy, especially considering that the United States already has the second highest integrated dividend tax rate among developed nations. Tax rates in the United States should be made more competitive, not less.

Distorted Incentives – Tax policy should not distort investment decisions. Taxing dividends at higher rates than capital gains would create tax policy that favors growth stocks over dividend-paying investments.

  •  Taxpayer Harm – Higher dividend tax rates would harm all Americans who invest directly in dividend paying stock or indirectly in mutual funds. This is especially harmful to retirees who saved and invested throughout their working life to supplement social security and ensure a secure retirement.
  •  Value Impairment – Higher rates would have a negative effect on the value of dividend-paying stocks, which would adversely impact those who have an interest in employer or union pension plans, 401(k) plans, individual retirement accounts and/or life insurance policies.
  •  Double Taxation – Dividends are already subject to double taxation – first at the corporate level when the company pays taxes on these earnings and again at the individual level when shareholders receive the dividends.
  •  Cost of Capital – Increasing the tax rate on dividends would increase the overall cost of capital for utilities, their shareholders and their customers.

Congress should reject President Obama’s proposed dividend tax increase and maintain the historic parity in tax rates between capital gains and dividends.

05/15