Listen to politicians’ advice on how to fix the economy (first of all, why are you still doing this?) and you will hear two senseless talking points: 1) the path to prosperity starts with increasing taxes on the rich, and 2) one way to make wealthy people pay more is by increasing the taxes on dividends.
Both points are erroneous. Both end up having the opposite intended effect.
I’ve written numerous articles discussing why increasing taxes on our wealthier citizens is bad economic policy. However, even accepting the notion that it would be beneficial, dividend tax increases will target other taxpayers to a greater extent.
Seniors will actually be hit the hardest by allowing the hike. According to Bloomberg analysts, 50% of dividend dollars are paid to senior citizens. In fact, 70% of all dividend income paid in this country goes to people over 50 years of age.
Seniors come from a generation that has revered the buy-and-hold strategy of dividend-paying companies and have invested heavily in them as sources of future income to supplement other retirement resources. If the tax rate on that income nearly triples—from the current 15% to more than 43%, including a 3% surcharge due to new healthcare legislation—we will significantly reduce the income of many who have no way of generating more.
At a time when we’re trying to shift the burden away from social security, this will only increase its necessity.
Sure, some of those seniors are Betty White rich. But, in reality, 70% of all dividend recipients have total incomes below $100,000 annually. Unless you live in rural Burundi, this doesn’t make you rich.
So maybe you don’t own $134,800 shares of Berkshire Hathaway (yeah, that’s a per share price as of December 21st) and don’t have any dividend-paying stocks either…as far as you know. The ripple effect will sneak into your bank account, whether you want it to or not.
Tens of millions of Americans own mutual funds that invest in companies that pay dividends. The majority of the country owns stocks either through this indirect method or through pension funds, life insurance policies, or 401(k)s and IRAs. All will be adversely affected if dividend tax rates triple in January.
Recently, we’ve heard a lot of talk about “fairness” as justification for increasing taxes on the rich. But, is it fair for legislators to choose how successful a company is based on the effect of the policy on a certain class?
If investment tax rates are allowed to increase, tax rates on the gains from the sale of stock will be lower than the dividend rate. This will naturally cause an investment class shift from once profitable dividend paying stocks, which are generally paid by the most successful blue chip companies, to riskier investments in other growth stocks.
Effectively, two things will occur: those companies who have proven to be the most efficient at allocating resources will lose investment dollars and, as a result, will shift away from paying dividends to shareholders, greatly reducing or even eliminating dividend income in this country. (Companies are not required to pay dividend income; it is merely enforced by the voice of the stockholders who own it. They are free to reduce or eliminate dividends at any time.)
It won’t just be the higher rate that will decrease Grandma’s income; they might lose the option to receive dividend income at all.
If dividend rates are allowed to triple in a few days, seniors and lower income individuals will actually be hurt more than rich people, stock prices will fall further exacerbating the effects, and money will be moved to riskier investments and debt, setting the economy up future failure.
But, hey, at least life will be more “fair,” right?
JUSTIN VELEZ-HAGAN is Senior Contributing Writer and Commentator for Politic365.com. He is also an Adjunct Instructor of Economics at the University of Maryland-University College and the National Executive Director of The National Puerto Rican Chamber of Commerce. He can be reached at Justin@Politic365.com.