Obama seeks big dividend tax hike for wealthy

Reuters News
Posted: Feb 13, 2012 1:29 PM
Obama seeks big dividend tax hike for wealthy

By Kim Dixon and Patrick Temple-West

WASHINGTON (Reuters) - President Barack Obama's 2013 election-year budget took investors by surprise with a call for significantly higher taxes on dividends, a major change from his earlier tax proposals and one that will raise the ire of dividend-paying companies.

Households earning more than $250,000 a year would see the tax they owe on dividends rise to a maximum of almost 40 percent next year, equal to the higher maximum income tax rate set to take effect in 2013. The current top income rate is 35 percent.

Obama again proposed raising the current 15 percent long-term capital gains tax rate to 20 percent for the wealthy. He had earlier also sought to set a 20 percent tax on dividends.

Obama's tax-and-spending plan - seen largely as a political statement as he campaigns for re-election in November -- focuses on new taxes from the wealthy and big corporations.

The plan he sent to a politically divided Congress on Monday is likely to win little favor, and most provisions are unlikely this year to become law, including the dividend tax increase.

"This is a reversal of what was a very specific policy feature of the first three budgets to keep dividends and capital gains taxed at the same rate," said Michael Mundaca, a former top Treasury tax official under Obama, now at the accounting firm Ernst & Young.

"Companies may be more likely to retain earnings or seek alternatives ways to distribute their earnings such as by buying back stock," Mundaca said.

Tax experts say it is generally most efficient to keep the capital gains and dividend tax rates the same, so as not to influence this type of decision making.

Kenneth Kies, a tax lobbyist for major Fortune 500 companies at the Federal Policy Group, noted that the top tax rate for high-income individuals could exceed 43 percent in 2013 once taxes from the healthcare reform law are imposed.

Facing higher dividend taxes, businesses may accelerate 2013 dividend payments into 2012 to dodge tax hikes, he said.

"I wouldn't be surprised if we see moving all their 2013 dividends into 2012," Kies said. "A lot of U.S. companies are sitting on cash."

Currently, taxes on dividends and capital gains are capped at 15 percent for all taxpayers.

(Reporting By Kim Dixon and Patrick Temple-West; Editing by Kevin Drawbaugh and Jackie Frank)