Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
The Ultimate Demise Of The Euro Union - 1st Sep 14
Palladium Price Breaks Multi-Year High Over $900 - 1st Sep 14
When Complexity Becomes Chaos - 1st Sep 14
Designer War By Default - 1st Sep 14
Islamic State or Russia? Ten Key Questions Towards Pragmatism - 1st Sep 14
Mixed Emotions for the Gold Market - 1st Sep 14
These Clowns Are Dragging Us Into War with Russia - 1st Sep 14
Marx And The Capitalist Cancer Of Overproduction - 1st Sep 14
Scottish Banks Salivating at the Prospects for an Independent Scotland of 6 Million Debt Slaves - 1st Sep 14
Small Man Europe Is Now In “Effective State Of War” With Russia - 31st Aug 14
The Unintended Blowback Of False Flags - 31st Aug 14
Tesco Supermarket Death Spiral Latest Profits Warning and Dividend Slashed - 31st Aug 14
Dow, Gold and Silver - A Last Stand, A Fake Out And A Surge - 31st Aug 14
If U.S. Consumers are so Confident Why aren't They Spending? - 31st Aug 14
Scotland Independence House Prices Crash, Deflationary Debt Death Spiral - 31st Aug 14
Obama’s “Catastrophic Defeat” in Ukraine - 30th Aug 14
Stock Market Inflection Point Approaching - 30th Aug 14
Gold And Silver - Elite's NWO Losing Traction. Expect More War - 30th Aug 14
Corporations Join Droves of Americans Renouncing US Citizenship - 30th Aug 14
Peter Schiff U.S. Housing Market, House Prices Bubble Warning - 30th Aug 14
Russia, Ukraine War - It’s Time to Play the “Gazprom Card” - 29th Aug 14
The One Tech Stock Investment You Should Never Sell - 29th Aug 14
Bitcoin Price $500 as Current Downside Barrier - 29th Aug 14
Don't Get Ruined by These 10 Popular Stock Market Investment Myths - 29th Aug 14
Low Cost Transcontinental Gold - 29th Aug 14
Gold Bullish Central Banks Should Give Money Directly To The People - Helicopter Janet? - 29th Aug 14
US House Prices Bull Market Over? Trend Forecast Video - 29th Aug 14
The Fed Meeting at Jackson Hole Exposed Yellen’s Greatest Weakness - 29th Aug 14
AAPL Apple Stock About To Get sMACked - 29th Aug 14
A History of Unlimited Money: Learn From It or Repeat Its Mistakes - 29th Aug 14
How You Can Play to Win When Market Makers Are Calling the Shots - 28th Aug 14
EU Gas Supply Is In Real And Imminent Danger - 28th Aug 14
Central Banks at the Root of Evil - 28th Aug 14
European Bond Market: Bubble of all Bubbles! - 28th Aug 14
Employers Aren’t Just Whining: The “Skills Gap” Is Real - 28th Aug 14
The ISIS Menace - Just What We Need, Another War - 27th Aug 14
The Risky Business of Methane-Rich “Fire Ice” - 27th Aug 14
CFR Recommends Policy Shift that is Very Bullish for Gold - 27th Aug 14
Ukraine Standoff Signals Global Power Shift - 27th Aug 14
Stock Market Panic Decline Begins - 27th Aug 14
The Monopoly of the Government Education Cartel - 27th Aug 14
How to Invest in Silver Today for Double-Digit Gains - 27th Aug 14
The Big Solar Energy Breakthrough We've Been Waiting For - 27th Aug 14
U.S. Empire’s Bumpy Ride - 27th Aug 14
Gold Market and the Interest Rate Trap - 27th Aug 14
Stock Market Staring Into the Great Abyss - 27th Aug 14
A Look at the Coming 30-year Inflation Cycle - 27th Aug 14
Forex Trading - Will USD/CHF Rally Above 0.9200? - 27th Aug 14
Europe’s Depressing Economy Dog Days of Summer - 27th Aug 14
How The Coming Silver Price Bubble Will Develop - 26th Aug 14
A Nation of Shopkeepers - Supply-Side (Voodoo) Economics? - 26th Aug 14
Stock Market Bear Tracks Abound In Wall Street - 26th Aug 14
65,000 U.S. Marines Hold up a Mirror to the Economy - 26th Aug 14
Bitcoin Market Provides Clues for Investors - 26th Aug 14
The Key to Trading Success - 26th Aug 14
Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?... - 26th Aug 14
Even Mainstream Academia Worried about Massive Bubbles in Markets - 26th Aug 14
Iraq and Syria Follow Lebanon's Precedent - 26th Aug 14
Colonization by Bankruptcy: The High-stakes Chess Match for Argentina - 26th Aug 14
Dow Stock Index On The Cusp - 26th Aug 14
Prohibition Laws and Agency Regulations - 26th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

Fiscal Cliff, Why The Rich Will Not Abandon Dividend Stocks

Politics / US Politics Dec 09, 2012 - 01:28 PM GMT

By: Richard_Shaw

Politics

WHO ARE THE RICH?  First an apology for using the term “rich”.  Because this is about pending tax policy, we are using the Washington D.C. working definition of rich.  You know — the movement that began with soak Warren Buffet and Bill Gates, because billionaires don’t pay enough and actually want to pay more — the soak the billionaires movement that quietly became the soak the millionaires movement, that morphed into soak the rich, who we find are those couples who make $250,000 per year or more (and singles who make $200,000 per year or more).


No doubt, $250,000 goes a long way for lifestyle in some towns, but barely keeps a family above water in NYC and some other places.  Anyway, $250,000 is the threshold for higher taxes being discussed as part of the fiscal cliff resolution, so we’ll go with that for the purposes of this letter.

Actually the argument of soak the rich, got changed to soak the top 1%, then the top 2% and recently in one speech the top 3%.  We think it is more reasonable to talk about percentile tiers than rich versus middle versus poor, but unfortunately for everybody, there is no way out of all our financial problems without everybody paying more one way or the other.  Washington surely has more recent data, but based on the published 2009 IRS tax statistics, those tax filers with adjusted gross income of $250,000 or more were 1.78% of all filers, and 3.06% of filers who owed any taxes.

[note: we are working off of Adjusted Gross Income here, and the law is proposed based on Taxable Income which is not the same number, so the tax impact in this discussion is somewhat different, but this data is probably good enough to study the general question; and if lots of deductions are capped or eliminated, AGI will begin to approach the taxable amount.]

If you should care to inspect the IRS tax statistics for 2009, they are available at this link.

We have the dilemma that the United States has increasingly tried to create a European style entitlements state (and playing the world’s policeman via a giant military), while at the same time taxing like a state where everyone has personal responsibility for their own outcomes.  As anyone who looks at Europe will see, it is not just the rich who pay a lot for universal benefits.

It is also a practical fact that corporations (and therefore the owners of private and public companies) don’t ultimately pay taxes.  When their costs go up (whether through taxes, labor costs, or other input costs), they eventually pass them through to the broad population in the form of higher prices for goods and services — in which case everybody pays.

BACK TO WHY THE RICH WILL NOT ABANDON DIVIDEND STOCKS

Those who fear that dividend stocks will collapse due to the scheduled increase of dividend taxes to the ordinary rate are most likely wrong, because the impact is far less on the rich (as defined above) and far less overall than the surface numbers suggest.

FIRST, only about 1/2 of all dividends are earned by individual taxpayers, as this graphic from Fidelity for 2010 shows:

SECOND, about only 60% of all dividends earned by individuals were earned by those in the rich category, as this table of extracted data from the 2009 IRS tax statistics shows:

(click image to enlarge)

THIRD, when you combine the 50% of stocks owned by individuals with the approximate 60% of dividends in individual tax returns that are earned buy the rich, you see that about 30% of overall dividends are earned by the rich (assuming that individual accounts, tax-deferred, and tax-exempt accounts, and non-US accounts have an approximately equal mix of dividend and non-dividend stocks,

That means that 70% of those individual accounts and tax-deferred and tax-exempt accounts, and non-US holders of dividend stocks are not scheduled to have any reduction in net cash flow from dividends as a result of the 2013 US tax rates for dividends.  They have no direct tax related reasons to move out of dividend stocks.

FOURTH, dividend income is only about 3.9% of the adjusted gross income of the $250,000+ earners who garner 30% of all dividend income, as shown in this chart which compares the percentage of income for the rich that comes from each source that is at least 1/2% of their adjusted gross income.

The rich got about 50% of their income from wages and salaries, about 23% from partnerships and sub-S corporations, 3.9% from dividends, 3.5% from taxable interest and 2.0% from tax-exempt municipal bond interest in 2009.

In 2009, capital gains were negligible, and are larger these days, but capital gains are less reliable than dividends.  The rich are not likely to decide to go solely for capital gains as a result of tax rate changes  They will want some mix of stable income and gain potential.  They can’t go substantially to bonds right now, because rates are very low and there is no income growth potential.

Muni bonds not only have credit risk which is rising, but tax exemption itself is potentially on the chopping block.  The Simpson-Bowles report recommended grandfathering old muni bonds and eliminating all tax exemption for new muni bonds.  The President has proposed limiting the tax benefit of muni bonds to 28% (in an environment where the full tax would be 43.4% (39.6% + 3.8% Medicare surcharge tax on all investment income).

FIFTH, the additional 24.6 points of tax on dividend income will be only somewhat less than 1% of their total adjusted gross income that is taken away versus this who are not rich.  That is  not enough to cause the rich to walk-away from dividends. (that is 24.6% of the 3.92% that came from qualified dividends in 2009) — the rich also got 0.88% of their income from non-qualified dividends in 2009, but they were subject to ordinary rates at that time.

We didn’t include the 3.8% Medicare tax as an additional burden on dividend income, because it is also applicable to every other sort of investment income; including interest, dividends, capital gains both long and short, rents, and royalties. There is simply no place to hide from that.

CLOSING

We don’t want to pay more taxes, and most likely you don’t want to either; and the extra bite out of dividend income is unpleasant. However, in light of these facts, we don’t see the market overall reacting as drastically to the change in dividend tax rates as the 15% to 43.8% (basically 3X) change to the top rate suggests on the surface.

A minority of all dividend income is earned by the rich.  A small portion the total income of the rich comes from dividends.  Dividends are less than 1/2 of the investment income of the rich.  And, the rich don’t have many other places to go to find yield that provides the combinations of income growth, liquidity and relative stability and safety as high quality, brand dominant companies with good dividend coverage and long histories of paying and increasing dividends.

What do you think?

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2012 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw Archive

© 2005-2014 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

Free Report - Financial Markets 2014