Sunday, February 26, 2012

Obama's 2013 budget: Retirees to be hit with huge tax

If you look closely at President Obama's 2013 budget, you'll see there's a proposal in it to approximately triple the tax rate on corporate dividends. The current rate is 15 percent.

Obama says the dividend tax rates should be more closely aligned with the higher-end personal income tax rate of 39.6 percent. This rate hits 41 percent when you factor in the planned phase-out of deductions and exemptions, and then goes all the way to 44.8 percent once the 3.8 percent investment tax surcharge from ObamaCare goes into effect.

As The Wall Street Journal put it in a recent commentary, "Of course, the White House wants everyone to know that this new rate would apply only to those filthy rich individuals who make $200,000 a year, or $250,000 if you're a greedy couple. We're all supposed to believe that no one would be hurt other than rich folks who can afford it.”

However, the truth is that those who can least afford it would be most impacted by the hike: retirees who depend on dividend income to get by. According to IRS data, almost three of four dividend payments go to those over the age of 55, and more than half go to those older than 65.

The Journal also pointed out that all shareholders will be affected, regardless of income levels. "Historical experience indicates that corporate dividend payouts are highly sensitive to the dividend tax. Dividends fell out of favor in the 1990s when the dividend tax rate was roughly twice the rate of capital gains," it says. "When the rate fell to 15 percent in 2003, dividends reported on tax returns nearly doubled to $196 billion from $103 billion the year before the tax cut, and by 2006, dividend income had grown to nearly $337 billion."

Reviews have shown that the tax cut played a significant role in the increase in dividend payouts.

“If you reverse the policy, you reverse the incentives,” the Journal wrote. “The tripling of the dividend tax will have a dampening effect on these payments.

In addition to retirees, The Journal concluded that “all American shareholders would lose” because the taxes would make stocks less valuable and prices would fall, causing a sell-off. Today, 51 percent of Americans hold shares of stock either directly or through mutual funds.

Once again, President Obama claims he cares, but if you are one of the millions of average Americans trying to secure your future through investments, plan on giving roughly half of your earnings to the government through higher taxes. For those on fixed incomes to begin with, it seems that would be a painful price to pay.

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