Proposed Dividend Tax Is As Uninformed As It Is Naive

by: Joe Eqcome

As an analyst there are some articles that after you read them you say to yourself, "I wish I'd written that one". One such article appeared in the February 23rd edition of the WSJ's "Review & Outlook" section and was entitled "Obama's Dividend Assault".

Essentially, the article addresses President Obama's 2013 budget proposal that recommends raising the taxes on qualified dividends for couples earning over $250,000 from its current 15% tax rate to the higher personal income tax rate of 39.4%.

It Gets Worse: The article goes on further to state that if you assumed a 35% corporate tax, add in the planned phase-out of deductions and exemption, a 3.8% tax surcharge for ObamaCare on top of the 41.0% projected personal tax rate (44.8%), that the pre-tax income that generated that dividend would be taxed at 64.1%. Therefore, a corporation would have to generate $278.55 in earnings so an investor could receive $100 dividend payment.

Retirees Suffer: The article cites that according to IRS data, three-quarters of the dividend recipients are retirees and near-retirees (over 55) who depend on such dividend income to pay for the necessities of life.

They have already been "socked" with low interest rates on bank CDs and money market funds due to the artificially low interest rates set to bail out the bankers, and now they are being "knocked out" by confiscatory taxes on dividends.

"Let Me Count the Ways": This action is counterproductive in so many ways that space limits the recital. Historically, dividends have been approximately 50% of the return on investments-and those stocks, over the long-term, perform better than non-dividend paying stocks. In addition, paying dividends is a discipline on corporate management with regards to cash flow transparency, and it prevents management from buying in stock so they can excessively award themselves stock options.

Simple Physics: Newton's Third Law of Motion is: "For every action there is an equal and opposite reaction." The imposition of such a confiscatory tax law on dividends would have the impact of corporations not paying dividends. Therefore, the federal government would not collect the estimated revenues and would distort the flow of capital by creating an unequal tax rate for capital gains versus dividends.

Gresham's Law Applied to Economic Policy: If there is a corollary to Gresham's law that "bad money drives out good", then can bad policy drive out good policy? That proposition would make one question the rest of the administration's economic policy based upon this uninformed dividend proposal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.