COMMENTARY | According to the Wall Street Journal, a proposal tucked into President Barack Obama's fiscal year 2013 budget proposal would triple the tax rate on corporate dividends. Obama claims this is a tax increase on the rich. But it will hammer elderly retirees.
Obama is not likely to be deterred by the macroeconomic downside of his proposal. As CNN notes, he believes Jesus Christ would approve of his attempts to soak the rich.
The proposal would raise the tax on dividends to match the higher personal income tax rate, which would be as high as 39.6 percent when the George W. Bush tax cuts expire next year. Then Obama proposes to phase out certain deductions and exemptions, bringing the highest tax rate on dividends to 41 percent. Adding the 3.8 percent investment tax surcharge brings the effective tax on dividends to 44.8 percent.
Dividends are paid out after a corporation pays the 35 percent corporate income tax. So the total tax on corporate income passed through as dividends would be 64.1 percent.
Obama would no doubt claim only those filthy, greedy rich people making more than $200,000 a year ($250,000 for every filthy, greedy rich couple) would be affected by the tax hike. But whether a corporation pays out dividends is highly influenced by the tax on dividends. Raise the tax on dividends, and a company has less incentive to pay a dividend. A study conducted by the Heritage foundation notes historical data that backs up this supposition.
The study also notes retired seniors are more likely to own dividend paying stocks as part of their retirement investment portfolio than any other demographic. More than 15 million, according to 2005 statistics provided by the IRS. Dividend income provides a much needed immediate cash flow for retired people.
But if the tax on dividends is increased, that income will be cut off, depriving retired seniors of all income levels. So as is often the case, government tax policies tax aim at the rich but hit more vulnerable groups.
One also expects the Obama administration has not factored in the inevitable decrease in dividend payments its tax increase will cause. Thus, the tax boost will not only hammer senior citizens, but will likely garner less tax income than intended.
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