Charlie Rangel's Stealth Tax Hike on
Capital Gains and Dividends
By Ryan Ellis
•
Tuesday, July 14, 2009 11:48 am
There's been a lot of talk over the past several days about how House Democrats are going to pay for their version of government medicine with a "surtax" on AGI.
Much of the analysis has focused on how this will impact the top marginal tax rate, or the tax rate paid by small business profits, and all that's true.
But what about shareholders? Specifically, what impact will this have on long-term capital gains and qualified dividends?
- The long-term capital gains tax rate is currently 15 percent. A surtax of 3 percent would bring that to 18 percent today. In 2011, the long-term capital gains rate is scheduled to rise to 20 percent. The post-surtax rate would be 23 percent
- The tax rate on qualified dividends is currently 15 percent. The surtax would bring that to 18 percent overnight. In 2011, qualified dividends will be taxed at a rate of 39.6 percent, or 42.6 percent post-surtax
What would this do to the integrated tax rate on corporate income? There's already a first bite at the apple with the 35 percent corporate income tax. Assuming 20% of after-tax profits are returned as dividends (the historical average), here is how that works out:
- Under current tax rates, the integrated tax on corporate profits would be 44.75%
- Under current tax rates plus the surtax, the integrated tax rate is 46.7%
- Under the 20/20 rate structure Obama ran on, the integrated tax rate is 48%
- Under 20/20 plus the surtax, the integrated rate is 49.95%
- Under 20 percent cap gains and 39.6 percent dividends, the integrated rate is 50.548%
- Under 20/39.6 plus the surtax, the integrated rate is 52.498%
Don't forget that this is the integrated, blended rate not only of the portfolio tax and the surtax, but also a historical ratio of dividends to retained earnings. The worst-case scenario (which looks more and more likely every week) would result in an increased tax wedge on corporate profits of nearly 8 percentage points. That translates into market correction of at least a couple percent. Every 1 percentage point of market cap loss translates to over $100 billion of shareholder wealth.
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