When it comes to the “2013 Fiscal Cliff,” It’s A Matter of Simple Arithmetic

By May 8, 2012Taxation

At at the end of the year the top dividend tax rate (roughly 25% of all dividends earned) will rise from 15% to 43.4% which has manufacturers very concerned. This rate change reflects the expiration of the 2001/2003 tax cuts, which lowered the rate from 39.6% percent to 15%, as well as the new additional 3.8% surtax under the Affordable Care Act of 2010. This will be the single largest dividend tax hike in history!

This is bound to have an impact on the stock market. In a May 4th Op-Ed that appeared in the Wall Street Journal, Donald Luskin concludes that if no action is taken by Congress, the stock market is set to fall by at least a whopping 30%. According to Luskin, it all comes down to simple arithmetic – when the tax rate goes up, the after-tax yield goes down thereby causing the stock price to fall.

Manufacturers are concerned about the effects of this tax increase, and with good reason. The rate change will impact the entire market, as companies that do not pay dividends may still be priced with the expectation that dividends will be paid in the future.

And who stands to lose? Corporations and shareholders of all incomes, including retirees, pension plans, etc. While we often hear high taxes on investment income will only affect the wealthy, the reality is that all shareholders will be hurt, as corporate dividend payouts are reactive to the dividend tax. Let’s also not forget that dividends are only paid to shareholders after a corporation is taxed on its profits. 

If lower rates for investment income are allowed to expire, the cost of capital will increase, investment will lag and manufacturers in the U.S. will find it harder to create jobs and effectively compete in the global marketplace. Manufacturers are urging Congress to address this issue soon and restore confidence to investors, or we will all be experiencing the negative market effects come January 1st, 2013.

Emily Sternfeld is a policy associate, National Association of Manufacturers.

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