The Great Dividend-Tax Mystery

Online WSJ ^ | 24 April 2010 | By LAURA SAUNDERS

[combat_boots]

Next year, what will the top tax rate on dividends be?

Investors like Clint Myers, an investment actuary in Georgetown, S.C., want to know. Some experts cite a 20% figure, while others say 39.6%, and still others talk about a tripling of the current 15% rate. "Lately I have seen figures citing almost any rate you can imagine," Mr. Myers says.

The short answer is that the 2011 nominal rate on dividends could be either 20% or 39.6%. Or something else—it is impossible to say given the legislative mood these days. So here is a longer answer analyzing the variables.

Next Jan. 1, a package of tax changes enacted under President George W. Bush expires. These provisions contained a historic change for dividends: For the first time, most were taxed at the same low rate as capital gains. Until then dividends had been grouped with interest, with both taxed at the higher rates levied on wages. In 2003 the nominal top rate on qualified dividends (usually, on stocks held longer than two months) dropped to 15%, where it has been ever since.

[combat_boots]

General partnership tax rates to change.

What with VAT being discussed, death tax again, Kerry's idea of 20 cent/gallon on gas, etc., etc. and the CBO figure of $1 Tn cost to health care, this is deep blue water.

"Can't stop a one-car parade if we tried to.........."

[Godwin1]

Raising dividend rates will cause investors to buy fewer dividend yielding stocks. Less capital going into the market translates into less grown and fewer jobs. These stocks, many in utilities and other old reliables,are especially sought by middle aged and elderly persons looking for a modest but steady income stream to supplement social security and other retirenment instruments. Raising the tax rates on them punishes those trying to be independent in their old age. Keeping the rate at 15 percent would be good public policy.