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Obama seeks big dividend tax hike for wealthy

Mon Feb 13, 2012 4:35pm EST

* Tax-and-spending plan calls for raising dividend tax

* Dividend rate would rise to top income tax rate level

* Proposal marks significant change from past budgets

By Kim Dixon and Patrick Temple-West

WASHINGTON, Feb 13 (Reuters) – President Barack
Obama’s 2013 election-year budget took investors by surprise
with a call for significantly higher taxes on dividends, a major
change from his earlier tax proposals and one that will raise
the ire of dividend-paying companies.

Households earning more than $250,000 a year would see the
tax they owe on dividends rise to a maximum of almost 40 percent
next year, equal to the higher maximum income tax rate set to
take effect in 2013. The current top income rate is 35 percent.

The Obama administration cited the need to raise funds
to pay down the government’s budget deficit and to make the tax
code more progressive as reasons driving the policy change.

“Choices had to be made,” a senior Obama administration
told reporters, explaining the bid to raise more than $200
billion over a decade with the steeper dividend taxes on the

Obama again proposed raising the current 15 percent
long-term capital gains tax rate to 20 percent for the wealthy.
He had earlier also sought to set a 20 percent tax on dividends.

The tax-and-spending plan – seen largely as a political
statement as he campaigns for reelection in November – focuses
on new taxes from the wealthy and big corporations.

The plan he sent to a politically divided Congress on Monday
is likely to win little favor, and most provisions are unlikely
this year to become law, including the dividend tax increase.

“This is a reversal of what was a very specific policy
feature of the first three budgets to keep dividends and capital
gains taxed at the same rate,” said Michael Mundaca, a former
top Treasury tax official under Obama, now at the accounting
firm Ernst Young.

“Companies may be more likely to retain earnings or seek
alternatives ways to distribute their earnings such as by buying
back stock,” Mundaca said.


Companies complain that dividend taxation is a double
tax, adding an individual investor tax on top of the corporate

Suggesting that this argument is over-stated, William
Gale, an economist at the centrist Tax Policy Center, has
written that half or more of dividends are not taxed because
they flow to pension funds, retirement plans and other

Backers of lower dividend taxes also point to data
showing that older investors are more likely to benefit from

The justification for keeping capital gains rates low –
preventing investors from artificially holding onto investments
when they want to sell – is not as relevant for dividends, the
senior administration official said.

“The U.S. income tax had dividends treated as ordinary
income from 1913 to 2003 so we’re really going back to the long
term tradition,” the official said.

Companies also say boosting dividend taxes will sap
economic growth. President George W. Bush cut dividend and
capital gains taxes in 2003, and the economy grew for several
years, but it is impossible to sort out the impact of the tax

Kenneth Kies, a tax lobbyist for major Fortune 500
companies at the Federal Policy Group, noted that the top tax
rate for high-income individuals could exceed 43 percent in 2013
once taxes from the healthcare reform law are imposed.

Facing higher dividend taxes, businesses may accelerate
2013 dividend payments into 2012 to dodge tax hikes, he said.

“I wouldn’t be surprised if we see moving all
their 2013 dividends into 2012,” Kies said. “A lot of U.S.
companies are sitting on cash.”

Currently, taxes on dividends and capital gains are capped
at 15 percent for all taxpayers.

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