From the October 2012 issue of Research Magazine • Subscribe!

EEI: ‘Congress & President Must Act Now To Extend Current Dividend Tax Rates’

Today our nation is facing a series of tax hikes and mandatory spending cuts that threaten to send the economy over a ‘fiscal cliff’ at the end of the year. One of these tax hikes would significantly impact stock valuations and harm the millions of seniors and other Americans who invest in dividend-paying stocks. If Congress and the President don’t act soon, the tax rates on dividends will spike by nearly 190 percent—from a top rate of 15 percent today to as high as 43.4 percent next year.

Such a steep tax increase will squeeze the already-tight budgets of many seniors and hard-working families, and create a domino effect that harms the entire U.S. economy. In fact, on August 22, the nonpartisan Congressional Budget Office (CBO) issued a dire warning that the United States would plunge into a significant recession next year should automatic tax hikes—including a dividend tax hike—and sequestration take effect in January. The result is disastrous: Slower job creation, hindered economic recovery, and decreased investment in dividend-paying companies from all sectors—including manufacturing, utilities, telecommunications, retail, pharmaceuticals, technology, and food producers.

Yet, some policymakers are advocating for the current dividend tax rates to expire—and others want to raise the rates only for taxpayers above certain income thresholds. They contend that wealthy investors are the only ones who receive dividends. But the reality is just the opposite. According to a recent study by Ernst & Young, 68 percent of all tax returns with qualified dividends were filed by taxpayers with annual incomes of $100,000 or less in 2009, the latest year for which complete IRS data are available.  

If the top tax rate on dividends sharply increases, higher-income investors, looking to reduce their tax burden, likely will shift to investments that are less focused on paying dividends. This in turn could cause dividend-paying companies to reduce the size of their quarterly dividend checks. The result: All dividend investors, regardless of their income level, will see the value of their investments fall as stock prices decrease.

The impact of a dividend tax hike is not just limited to those who invest directly in dividend-paying stocks or who invest indirectly in mutual funds. Anyone with an interest in employer or union pension plans, 401(k) plans, individual retirement accounts, and/or life insurance policies that invest in dividend-paying companies will feel the effect.

With so much economic uncertainty, lawmakers should act now to extend the current dividend tax rates for everyone for one year and enact comprehensive tax reform next year. Raising dividend tax rates now, without any sense of what will happen to them in 2014 and beyond, will shake investor confidence and discourage the capital formation our national economy needs.

Congress and the President must act quickly to stop a dividend tax hike for all Americans. Our Defend My Dividend campaign website—www.DefendMyDividend.org—provides more information about this important issue. You’ll also find a quick and easy way to contact your lawmakers in Washington so that you can add your voice to our cause.  — Edison Electric Institute

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