Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
The Ultimate Cash-Management Guide - 27th Aug 15
Why a Fed Rate Hike Could Be a Blessing for Gold Prices - 27th Aug 15
Why Devaluing the Yuan Won't Help China's Economy - 27th Aug 15
Stock Market Trend & Trade Signal Of the Decade - 27th Aug 15
Keep Your Eye On the Gold and Silver Bear - 27th Aug 15
Refugees Expose Europe’s Lack Of Decency - 27th Aug 15
How to Profit from China's Currency War - 27th Aug 15
How China's Currency Policies Will Change the World - 27th Aug 15
Chinese Medicine not Impressing Dr Copper - 27th Aug 15
Novel Biotech Novel Technology Platforms with Dramatic Growth Potential - 27th Aug 15
China Stocks Bear Market Crash, Are We Near the Bottom Yet? - 27th Aug 15
Stock Market Crash Black Wednesday Rally Crushes the Bears - 26th Aug 15
VIX Shorts Being Squeezed While SPX Prepares for Another Decline - 26th Aug 15
Why China's Economy is Deteriorating - 26th Aug 15
Citizenship as a Weapon: Travel Controls and What You Can Do About It - 26th Aug 15
Gold and Silver - How To Manipulate a Market - 26th Aug 15
How to Make a Quick 20% When the Stock Market Crashes - 26th Aug 15
Why We Can’t Handle A Stocks Bear Market - State Budgets Will Implode - 26th Aug 15
Stocks Bear Market, Is This 1929 All Over Again? - 26th Aug 15
The One Trading Strategy You Needed for Stock Market Crash - 26th Aug 15
Second Chance To Buy Cheap Gold Mining Stocks - 25th Aug 15
Gold Facts and Gold Speculations - 25th Aug 15
The Stock Market Crash Season is Here… - 25th Aug 15
Liftoff Setback Leads to U.S. Dollar Pullback - 25th Aug 15
The Stock Markets Are Extraordinarily Volatile, Here's What to Do - 25th Aug 15
Israel: The Case Against Attacking Iran - 25th Aug 15
Saudis Could Face An Open Revolt At Next OPEC Oil Meeting - 25th Aug 15
How to Calmly Weather This Stock Market Downturn - 25th Aug 15
Stock Market Sound the Alarm - 25th Aug 15
Stock Market Meltdown - Dow Monday 1000 Point Crash then Rebound, What's Next? - 25th Aug 15
El-Erian: Stock Market Sell off Is Not 1998 or 2008 - 25th Aug 15
Gold the Ultimate Financial Crisis Insurance - 25th Aug 15
Stock Market Black Monday Crash Fizzles Out, Next Black Tuesday? - 25th Aug 15
Black Monday - Rolling A Wheelbarrow Of Dynamite Into A Crowd Of Fire Jugglers - 24th Aug 15
Playing the Chinese Trump Card - 24th Aug 15
Gold and Silver: Heading for a “Blue Screen of Death” Event? - 24th Aug 15
Japan Economy Clear Conclusions Concerning QE - 24th Aug 15
Stock Market Blockbuster Right From the Open... - 24th Aug 15
Silver And The Petrodollar - 24th Aug 15
Why the Stock Market Sell-Off Happened – and How to Make Money on It - 24th Aug 15
Stocks Correct, Panic Ensues. The End Of The World? - 24th Aug 15
Stock Market - The Sky IS Falling - 24th Aug 15
SP500, DAX, FTSE - When Stock Markets Talk, Pay Attention - 24th Aug 15
Stock Market Black Monday - Full Crash Alert! - 24th Aug 15
Stock Markets Implode as China Literally Explodes - 23rd Aug 15
Stock Market Bloodbath - The Feds Gonna Need A Bigger Balance Sheet - 23rd Aug 15
Stock Market Due For A Breather (But More To Go) - 23rd Aug 15
Stock Market 20% Bear Market in the Works - 23rd Aug 15
Ankara: the New Capital of Jihad, U.S. Policy for Strengthening ISIS - 23rd Aug 15
Will Rising Interest Rates Crash UK House Prices? - Video - 23rd Aug 15
Stock Market Primary IV Underway? - 22nd Aug 15
Gold And Silver – NWO In Its Element: Problem, Reaction, Solution. Beware - 22nd Aug 15
Stock Market Nirvana Has Been Broken - 22nd Aug 15
Three Ways to Profit from the Stock Market Correction - 22nd Aug 15
S&P 2040 Breaks Down... Stock Market Turns Bearish - 22nd Aug 15
Storm Clouds Are Gathering Around Peer-to-Peer Lending Sector - 22nd Aug 15
Crude Oil Price Crash Continues: West Texas Crude Below $40, Brent Near $45 - 22nd Aug 15
Pandemonium in the Stock Market, Dow falls 1,000 points in a week - 22nd Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

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

© 2005-2015 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

Biggest Debt Bomb in History