Obama Administration Would Tax Dividends at Same Rate as Top Earnings

The rich would pay higher taxes on dividends under Obama budget (photo: bright strangely)

I’m loath to dive into the numbers of the Administration’s FY 2013 budget, because it won’t be used as anyone’s baseline, and to the extent that it will, that was baked into the cake by the debt limit deal. If you want the hard numbers, the surprisingly best source I’ve found comes from the Guardian.

Just as an example about how this is a document that won’t cause much interest in Congress, look at the transportation numbers:

• Proposes $556 billion over six years to upgrade roads, bridges and expand high-speed rail, 60% more than the last plan enacted by Congress.
• Boosts funding by $50 billion in the first year to create jobs in industries suffering from protracted unemployment.
• Provides $53 billion over six years for high-speed passenger rail
• Invests $30 billion in a National Infrastructure Bank to provide loans and grants for projects of regional and national significance, supporting economic competitiveness.

The House Republican transportation bill, which Ray LaHood called the worst transportation bill I’ve ever seen, only provides $260 billion, actually far less than half of what the Administration wants.

So why cover this at all? Aside from the fact that little else is going on, there is one new wrinkle, or at least new to me, that would represent as significant a change to income inequality as anything the Administration has yet proposed.

In his new budget blueprint, President Obama is proposing to tax dividends of the wealthiest taxpayers as ordinary income subject to their top income-tax rate, which was the practice until the Bush administration lowered the rates. The proposal, released on Monday morning with other parts of the budget, would raise about $206 billion over 10 years.

Assuming that the Bush-era tax cuts expire at the end of the year, as required by law, dividends for the top 2 percent of income-earners would be taxed at 39.6 percent. Before 2002, the richest taxpayers paid a 35 percent tax on dividends, like on all ordinary income.

Republicans are certain to try to block the change, as they have done to thwart Mr. Obama’s 2008 campaign promise to end the Bush-era tax cuts for those making more than $250,000 a year.

This is not a change on capital gains, the money earned through sale of stock at a profit; it’s on dividends, the money earned through corporate payouts of profits to shareholders. The capital gains tax rate would rise to 20% from 15% under the Obama proposal, consistent with prior years. However, in the past, Obama budgets have proposed a similar increase to dividends, up to 15%. No more: this increases dividend taxes all the way to 39.6%.

This only would hold for the wealthiest households. Taxpayers making under $250,000 a year would see the same dividend tax rate as before. So this is a specific effort to extract more in dividend taxes from the wealthy.

And that attacks a soft underbelly of the tax code – investment gains that the wealthy save or pass to descendants, rather than use in the real economy. While much of income inequality can be explained through before-tax income, at least some of it can be explained by how softly the US taxes dividends and capital gains, and how easily the rich can shift their earnings from ordinary income into these other income sets. I would argue that capital gains should follow the same structure, but targeting dividends in this way at least puts those income sources on the same footing as others. As an Administration official told the New York Times, “Part of the motivation for this is that there are currently too many ways for the wealthy and the well connected to avoid paying their fair share of taxes. Much of income escapes taxation even at the corporate level.”

Generally, I think this is a pretty good idea, consistent with the new shift in emphasis toward using taxation to get at the deficit over spending, but also attacking one of the sources of income inequality, which has disastrous social effects.

UPDATE: The entire budget document is here.

Exit mobile version