Dividend Debacle


Investors get caught in partisan crossfire.

Investors get caught in partisan crossfire.

Fortnightly Magazine - October 2010

It’s almost impossible to discuss dividend taxes without siding with one partisan political camp or the other. If you want to cut dividend taxes, you’re probably a Republican. You believe the private sector is more effective at deploying capital than the public sector is, and dividend taxes—like all forms of investment taxation—take money away from private investors and put it into government hands.

On the other hand, if you want to see dividend taxes raised, then you’re a Democrat. You believe dividend and capital-gains taxes are inherently progressive forms of taxation, lightening the load for lower and middle income taxpayers and shifting it toward those who spend a smaller share of their income on basic necessities.

Few economic issues are so simple, however, that they can be reduced to a binary choice between pure capitalism and progressive interventionism. Dividend taxes are no exception, with cogent arguments for and against extending the 2003 tax cuts—which reduced the rate for dividends in the highest tax bracket from 39.6 percent to 15 percent, and lower rates for other brackets.

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Lawmakers on both sides of the aisle agree that the 2003 tax cuts shouldn’t simply be allowed to expire. Where they disagree is on policy going forward. The Obama administration proposes to adjust the highest tax rate to 20 percent—higher than the current 15 percent, but about half of the pre-2003 rate. Obama’s Republican opponents want a full extension of the same rates for all tax brackets. Many Democratic lawmakers agree with their Republican colleagues, and others would support the Obama proposal. Only a few want to see the pre-2003 rates reinstated in whole.

Unfortunately, during this year’s mid-term campaign, politicians on both sides of the aisle are behaving more like unruly kids than national leaders; they’re more interested in an ideological food fight than they are in cooperating to forge rational economic policy. And that’s a shame, because Congress’s failure to compromise on this issue might put America’s utility industry at something of a disadvantage in the capital markets—just as companies are preparing to finance a historic wave of construction in job-creating domestic infrastructure.

Fortunately, food fights never last forever. This particular battle will end sometime around 9 a.m. on November 3. And early next year, the uncertainty about dividend taxes will dissolve when lawmakers re-convene to clean up their mess.

Tax Facts

Dividend taxes make for juicy sound bites in the national media. Conservatives argue that taxing investment income discourages people from putting their capital to work, sending a counter-productive economic signal. In today’s shaky economy, raising taxes seems like a questionable idea for any income group—least of all those who are investing in capital-intensive, offshore-resistant industries like utilities. Republicans on the campaign trail are using this argument to justify stonewalling Obama and the Democrats.

Meanwhile, progressives point out that tax cuts for rich people produce a smaller multiplier benefit for the economy than other budget options do. Congressional Budget Office (CBO) statistics show,