If the White House and Congress don’t work out a deal to avoid the fiscal cliff, then Americans will see some big tax changes at the start of the New Year, including a tax hike on dividends. The Left supports higher dividend taxes because they think the much-maligned wealthy need to pay more in taxes. You may recognize this same tired talking point from their calls to let the Bush-era tax cuts expire on top earners. But what they overlook is the fact that higher dividends will impact a far greater number of Americans than they intend. Higher dividend taxes will cause people all along the income spectrum – not just millionaires and billionaires – to feel pain in the wallet.
For the last decade, qualified dividends have been taxed at the same rate as capital gains. That’s 15 percent for the top four income tax brackets, and 0 percent for the lowest income tax bracket. But beginning in 2013, dividends will be taxed at the same rate as ordinary income, which is much higher. Top earners will see the tax rate on dividends literally triple – it will jump from 15 percent to 39.6 percent, plus a new 3.8 percent Obamacare surtax.
Middle-income Americans will also be hit hard by the tax hike, as millions of them directly own stocks that bear dividends. Millions more own stocks indirectly through mutual funds — according to data from the Investment Company Institute, 44% of households do. In addition, their retirement accounts and pensions are based on stocks that pay dividends. Hiking taxes on dividends will slow the growth of their nest egg, threatening their quality of life later in life.
Similarly, older Americans will be worse off too, since they depend on dividends as a source of income in their retirement. According to IRS data, nearly 75 percent of dividends are paid to people over the age of 55, and more than half go to those older than 65. Facing higher taxes on dividends, they will have less money to live on during their retirement.
A brand-new report from the Tax Foundation sheds some light on how much the tax hike on dividends will damage the economy. Coupled with a tax hike on capital gains, the tax hike on dividends will shrink GDP by more than 6 percent and cause the national wage rate to fall more than 5 percent.
Higher dividend taxes will pick the pockets of lower-income Americans, including those who don’t own stocks themselves. They will feel the secondary effects of the tax hike, such as lower economic growth and slower hiring. The low-income will have more difficulty finding a job and earn less.
Washington needs to be honest about what it is trying to accomplish with these tax hikes. Our elected officials can’t honestly claim that they’re targeting the rich, since the low- and middle-income will be shouldering the weight of these tax hikes, too. While Americans continue to struggle in the down economy, now is not the time to enact tax hikes of this magnitude.
Christine Harbin is a policy analyst at Americans for Prosperity.