Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Why Dividend Investors Should Worry About an Obama Election Victory

ElectionOracle / US Presidential Election 2012 Sep 12, 2012 - 10:56 AM GMT

By: Money_Morning

ElectionOracle

Best Financial Markets Analysis ArticleMartin Hutchinson writes: I don't have to tell you there is a lot at stake for dividend investors in November.

In fact, an Obama victory could hit income investors with something of a double whammy.

You see, for dividend investors it isn't simply just a matter of higher tax rates, the changes President Obama has in mind may result in fewer dividends paid altogether.


You can chalk it up to the law of unintended consequences.

Let me explain.

Thanks to the Bush tax cuts of 2003, dividends are currently taxed at 15% to individual investors.

The rationale for the change was that dividends are paid from income that has already been taxed once at the corporate level. It means the total top federal tax rate on dividends, including the 35% corporate tax, is currently 45% (the net received is 85% of 65%).

Even with the tax break, that's still higher than the top 35% rate of personal income tax.

That's bad enough, but even if the Bush tax cuts are renewed before the "fiscal cliff" strikes at the end the year, investment income will suffer an additional 3.8% tax starting on January 1 to pay for Obamacare.

That means the total tax on dividends could jump to a whopping 47.2%.

Of course, if your total income is less than $250,000 for a married couple you will not pay this, so your total dividend tax rate will remain 45%.

But again, that's just the status quo, which is no big win, either.

The truth is that in a sensible tax system, dividends would be deductible from corporate income for tax purposes, and then taxed at the full individual rate.

This would put dividend on the same footing as interest, eliminating the corporate subsidy for leverage.

It would also eliminate most corporate tax shelters, since shareholders would demand that management not enter into tax shelters that cost money, when they could simply pay the money to them as dividends.

This isn't some wild Ayn Rand fantasy, either.

It's essentially the system that has been used in Britain since 1973. However, regrettably, neither party is proposing it here.

An Obama Win Means Even Higher Taxes
What we do know is that if Republican Mitt Romney is elected, the dividend tax rate for individuals will probably stay at 15%.

In addition, Romney plans to cut the corporate tax rate to 25%. Since he plans to repeal Obamacare, the chances are its 3.8% surtax will disappear also.

If Romney is successful, that would take the dividend tax rate down to 36.2%, similar to the top individual income tax rate.

Of course, that's the "best case" scenario. Still, at worst the total dividend tax rate should stay around the current 45% level.

Meanwhile, if President Obama is re-elected, he has pledged to reduce the corporate tax rate to 28%. That's the good news.

The bad news is that he has pledged to reverse the 2011 cut in individual tax rates, make the top tax rate 39.6%, and eliminate the preference for dividends.

So adding in the Obamacare 3.8% surtax, the total tax rate on dividends would rise to 59.2% if he cuts the corporate tax rate or 63.2% if he doesn't.

That's a very substantial difference than what Romney is proposing.

The Double Whammy For Dividend Investors
But as I said earlier, thanks to the law of unintended consequences there is more to this story than tax rate differences.

That's because corporate management is largely paid today through stock options. It means they really don't like dividends to begin with since they reduce the share price when they are paid, and hence reduce the value of management's options.

Instead, management prefers share repurchases, which tend to increase the share price, along with the value of their options.

Here's the rub for dividend investors...

A big increase in dividend taxation will allow management to decide that dividends are "tax inefficient" and cut or eliminate them.

It's just another part of a larger and ongoing trend.

You see, dividends have been in long-term decline as a percentage of earnings, from about 56% in the 1960s for the Standard and Poor's 500 companies to about 32% in the 2000s, though they rebounded somewhat after the 2003 tax change.

Faced with even higher taxes, you can bet that management will take the opportunity to reduce them even further. Our after-tax dividend income will thus suffer a double whammy from an Obama victory, from the increase in tax and a reduction in dividends.

Of course, there is nothing we can do about the increase in the dividend tax, if it occurs.

However, we can at least eliminate the dividend reduction effect by investing in real estate investment trusts or resource master limited partnerships.

These entities are forced to pay out 90% of their income in dividends, in return for which they suffer no corporate tax. So by investing in REITs and MLPs we achieve two things.

First, by eliminating the corporate income tax we reduce the total dividend tax to our individual tax rate. Second, it leaves corporate managements grinding their teeth in frustration, because the law won't allow them to cut our dividends-even though they may want to!

You'll have to admit, zapping the taxman and greedy corporate management with one investment can't be all that bad!

In the meantime, the fate of our dividends is in the hands of the voters.

Source :http://moneymorning.com/2012/09/12/why-dividend-investors-should-worry-about-an-obama-victory/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules