President Obama is very keen to rock his weak economy with big tax increases – congressional aides have taken to describing his potential re-election as “Taxmageddon” – but there’s nothing he’s more eager to grab than corporate dividends. In fact, as the Wall Street Journal points out today, he wants to triple taxes on dividends, to a whopping 64 percent:
Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today’s 15% rate.
Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.
Dividends are often discussed in concert with capital gains, but Obama wants to tax dividends at a far higher rate. Besides satiating his general greed for tax money, the idea behind confiscatory tax rates on dividends is to force corporations to re-invest their profits as capital, rather than paying dividends out to stockholders.
(I suppose Obamanomics gurus would portray the lower tax rate for capital gains as an “incentive” for recapitalization, but it’s long past time for Americans interested in preserving their freedom to stop thinking that way. Instead of viewing lower tax rates for government-favored activities as “incentives,” we should focus on the higher rates against disfavored activities as the exercise of compulsive force.)
This disparity will be defended on the grounds of “job creation,” because it’s better to have businesses re-invest their profits to facilitate corporate expansion, instead of throwing money at fat-cat “millionaires” (defined by the Democrat Party as people who make $200,000 or more per year) who don’t need another stack of hundred-dollar bills to light their cigars with. Plus, our technocratic President, who is history’s greatest investment genius, can use all that lovely money confiscated from corporate dividends to fund more of his spectacular “green jobs” projects. The next Solyndra ain’t gonna finance itself, people.
But hold on a second. Doesn’t one of the basic principles of Obamanomics say that showering people with money is the best way to achieve “trickle-up” stimulus, because they run out and spend that money on stuff, causing jobs to coalesce around their demand? That is the express reason Obama thinks unemployment insurance is the most effective “stimulus” known to man, despite all evidence to the contrary. So why does he want to squeeze off the money shower from dividends?
Well, all those dividends go to the Evil Rich, who don’t need any more money… right? Wrong. As the Journal explains, “IRS data show that retirees and near-retirees who depend on dividend income would be hit especially hard. Almost three of four dividend payments go to those over the age of 55, and more than half go to those older than 65, according to IRS data.” Not content with his vote-buying raid on Social Security funding to finance his “payroll tax cut,” Obama wants to go after the private income of retirees as well. Why does this President hate old people?
High dividend taxes also depress stock values, and a massive dividend tax increase could produce a selling frenzy on the eve of Obama’s second term. “The question is how this helps anyone,” wonders the Journal. “According to the Investment Company Institute, about 51% of adults own stock directly or through mutual funds, which is more than 100 million shareholders. Tens of millions more own stocks through pension funds.” Why does this President hate working families?
But there’s one other reason to castigate Obama for tripling the tax on corporate dividends: like so much of Obamanomics, it’s a policy of stasis, which will act to paralyze investment.
When dividends are paid to investors, those individuals are free to re-invest the money as they see fit, in a variety of different companies. History is quite clear on the benefits of such dynamic investment:
An American Economic Association study by University of California at Berkeley economists Raj Chetty and Emmanuel Saez examined dividend payouts by firms and concluded that “the tax reform played a significant role in the [2003 and 2004] increase in dividend payouts.” They also found that the incentive for firms to pay dividends rather than sit on cash helped “reshuffle” capital from lower growth firms to “ventures with greater expected value,” thus increasing capital-market efficiency.
Barack Obama does not understand any of this, because it runs contrary to his ideology, which stipulates that central planners are far more skilled at guiding the economy than millions of individuals, exercising their economic freedom. Efficient capital markets are much less interesting to him that “fair” markets, which funnel investment into politically-selected “winners.”
The carnage this wreaks upon retirement accounts and pension funds does not interest him, because he’s confident he can distract the unhappy peasants by pointing at the Evil Rich and vowing to raise their taxes even more, to fund more benefits for the increasingly dependent middle class. Class warfare is weaponized ignorance.
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