Tax Corporations Less... Tax Dividends More?

President Obama’s envisioned tax reforms could hurt wealthy retirees.

On Capitol Hill, a rough consensus is starting to emerge: a feeling that the corporate tax rate should be reduced to help U.S. firms stay globally competitive. At the same time, President Obama’s 2013 federal budget proposes a massive tax hike on corporate dividends, a change that could harshly impact the individual investor.

What if the corporate tax rate fell by 7%? President Obama wants to reduce the current 35% corporate tax rate to 28%. (Three of his possible Republican rivals in the fall 2012 election would like to take it even lower: Mitt Romney proposes capping corporate tax at 25%, Rick Santorum at 17.5% and Newt Gingrich at 12.5%.)¹

That’s not the only change the President would like to see. In addition, he has proposed:

• A minimum tax rate on foreign earnings (the specifics of which would be left up to Congress)
• A hiring incentive tax credit for businesses whose payrolls expand in 2012
• An extension of the current bonus depreciation extension on capital equipment through 2012^1,2

How would the government make up for lost revenue? It would nix certain loopholes, such as deductions on interest on corporate debt and longstanding tax breaks for oil and gas companies. Treasury Secretary Timothy Geithner claims that this corporate tax reform would actually generate $250 billion more for the federal government than under present tax laws. Detractors claim that the reforms would overtly favor manufacturers and discourage oil and gas production. They also point out that at a time when the federal government is crying for revenue, lowering the corporate tax rate by 7% is a weird move; after all, some savvy corporations may pay no taxes at all.^1,3

However, the 2013 federal budget proposal does detail some other methods for boosting tax revenue. One idea in particular is raising eyebrows among investors – particularly retired investors.

Should dividends be taxed as ordinary income? Would you like to see your stock dividends taxed at 39.6% instead of the current 15%? If you are an individual making more than $200,000 or a couple making more than $250,000 a year, that would be the reality you face in 2013 if the currently proposed federal budget passes.^4,5

Actually, your dividends would be hit even harder if you find yourself in the top tax bracket. Factor in the 2013 budget's envisioned phase-outs of deductions and exemptions, and the rate climbs to 41%; add the 3.8% “millionaire tax” levied to pay for health care reforms and you get to 44.8%. Toss in any state and local taxes, and the picture looks even gloomier.^4,5

It is no secret that older Americans own proportionately greater amounts of dividend-paying stocks than younger Americans. This population includes the most economically successful retirees, who do not want to see dividends taxed as they were in the 1990s. If this condition of the 2013 federal budget makes it through Congress unscathed, these households may be looking at major shifts in their tax and investment strategies.

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Citations.

• 1 - articles.latimes.com/2012/feb/22/business/la-fi-obama-corporate-tax-20120223 [2/22/12]
• 2 - www.kansascity.com/2012/02/13/3426281/obamas-proposed-tax-hikes-at-odds.html [2/13/12]
• 3 - www.chicagotribune.com/business/ct-biz-0226-outside-opinion-corporate-tax-rate-20120226,0,990984.story [2/26/12]
• 4 - news.yahoo.com/seniors-surreptitious-victims-obamas-corporate-dividends-tax-hike-231300879.html [2/24/12]
• 5 - money.msn.com/tax-tips/post.aspx?post=4bb02697-fe82-4c9a-ad0f-a164f50ce7c8 [2/17/12]