In the summer of 2008, the Obama campaign's two top economists proudly proclaimed that their candidate favored a dividend tax rate of 20 percent, "lower than all but five of the last 92 years." Well, that was then. In a sharp break from that campaign stance and the Administration's first three budgets, President Obama is now calling for an all-in dividend tax rate of almost 45 percent, the highest rate in 27 years. The president's about-face bodes ill for the economy.
While the president's proposal raises dividend tax rates only on high-income stockholders, Americans at all income levels will feel the economic impact of the tax hike. Higher dividend taxation will impede the investment that fuels long-run growth, depress stock prices, and weaken incentives for good corporate governance.
The president's proposal would allow the 2003 dividend tax cut to expire for high-income households at the end of the year, pushing the top dividend tax rate up from 15 to 39.6 percent. That's a dramatic increase in its own right. But, other provisions make the true increase even larger. The president also wants to bring back a provision phasing out deductions for high-income taxpayers, which will cause each additional dollar of dividends to trigger 1.2 cents of extra taxes. And, beginning next year, the president's health care law will impose an additional 3.8 percent tax on dividends and other investment income of high-income households. Under the president's proposal, the top all-in dividend tax rate will be 44.6 percent - almost triple today's 15 percent rate.