These Are The Obama Tax Hikes That Will Really Hurt

While President Obama and Speaker Boehner have been talking about what to do about tax rates on labour income, little has been said about the rise in dividend and capital gains tax rates — and how they intersect with the sky-high U.S. corporate tax rate. Ernst & Young:

Taking into account both the corporate and investor level taxes on corporate profits and state level taxes, the United States has among the highest integrated tax rates among developed countries and these integrated tax rates will rise sharply in 2013:

– The current top US integrated dividend tax rate of 50.8 per cent will rise to 68.6 per cent in 2013, significantly higher than in all other OECD and BRIC countries.

– The current top US integrated capital gains tax rate of 50.8 per cent will rise to 56.7 per cent in 2013, the second highest among OECD and BRIC countries.

And here is why that is a bad thing, according to Ernst & Young:

Most developed countries provide relief from the double tax on corporate profits because it distorts important economic decisions that waste economic resources and adversely affect economic performance:
– It discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards.
– It favours debt over equity financing, which may result in greater reliance on debt financing and leave certain sectors and companies more at risk during periods of economic weakness.
– A tax policy that discourages the payment of dividends can impact corporate governance as investors’ decisions about how to allocate capital are disrupted by the absence of signals dividend payments would normally provide.

Now Obama has mentioned cutting the corporate rate to 28%, but that move would leave the integrated capital gains rate more or less unchanged and the dividend rate sharply higher’

As E&Y point out, a) the top federal income tax rate on dividends will increase from its current level of 15 per cent to 39.6 per cent in 2013; b ) the  top federal income tax rate on long-term capital gains will rise from its current level of 15 per cent to 20 per cent in 2013; c) For many taxpayers, both dividends and capital gains will also become subject to the additional 3.8 per cent Medicare tax in 2013 due to changes under the Affordable Care Act of 2010.

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