Special Report: A Higher Tax Rate on Dividends: Would it Impact U.S. Economic Recovery and Capital Formation?

As the debate about how to revive strong U.S. economic and job growth continues, policymakers must confront a host of budget and tax policy decisions. One of the key issues to decide is the fate of the tax rates on income, capital gains and dividends which were enacted during the 2001-2005 period. The ACCF CPR presents this Special Report to help policymakers, the public and the media understand the short and long run consequences of raising tax rates on dividends.

Current economic data indicates that the U.S. economy is under siege. GDP is growing at a sluggish rate (1.5% in the second quarter of 2012), unemployment is persistent and now stands at 8.3% and the global economy is not doing much better. The approaching fiscal cliff in the U.S. which threatens significant tax increases at every income level and major cuts in spending, portrays a bleak reality for American citizens. The growing consensus around “fundamental tax reform” is not likely to be acted on until after the election, but policymakers should resolve the expiring “Bush tax cuts” dilemma sooner rather than later to alleviate some of the uncertainty facing American households and businesses.

A series of temporary tax relief measures were enacted by President Bush, including income tax rate cuts in 2001 as well as decreased tax rates for individual capital gains and dividends in 2003. These reductions brought parity between capital gains and dividend tax rates at 15%. Unless Congress acts, the top rate on dividends (now 15%) will expire at the end of this year, and revert to 43.4% (39.6% plus the healthcare surcharge of 3.8%) raising taxes by almost 190 percent for millions of Americans. Capital gains tax rate will rise to 23.8% (20% plus the healthcare surcharge).

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