Lower tax rates on income from dividends clearly benefit American investors and I'd argue the economy. Yet, unless Congress acts before the end of the year, the maximum tax rate on dividend income could skyrocket to as high as 43.4% from 15%. The top tax rate on capital gains, meanwhile, would rise to a maximum of 23.8% from 15%.
To stop this disproportionate dividend tax increase, the Edison Electric Institute and its member electric utility companies, along with a wide variety of associations, organizations and companies that have a stake in this issue, are sponsoring a national grassroots advocacy campaign - Defend My Dividend. We encourage you to join.
Keeping the tax rates on dividends low and on par with the rates on capital gains would help the tens of millions of Americans who own dividend-paying stocks, either directly or indirectly through mutual funds, retain more of the dividend income they receive. The lower rates also support the value of dividend-paying stocks held in life insurance policies, pension funds, 401(k) plans or individual retirement accounts.
If the current dividend tax rate expires, tax policy would revert to favoring debt over equity; it would also favor investment in companies that reward investors through capital appreciation as opposed to those paying dividends. Consequently, dividend-paying stocks are likely to be tarnished, and because the market is forward-looking, the prices of such stocks may soon be falling.
It is also important to keep in mind that shareholder income is already essentially taxed twice. A company pays a corporate income tax on its earnings; this reduces the amount of net income that can be paid out to shareholders in the form of dividends. These shareholders then pay a personal tax on their dividend income.
The top U.S. integrated dividend tax rate is currently 50.8% - when corporate and individual tax levels, as well as state taxes, are factored in - according to a study released in February by Ernst & Young for the Alliance for Savings & Investment. If Congress and the president don't act to stop the increase, the top U.S. integrated dividend tax rate will rise to 68.6%, the highest level among developed nations.
Visit DefendMyDividend.org to learn more about this important economic issue and join the effort to tell Congress to stop a dividend tax increase.
Richard McMahon is vice president of energy supply and finance at the Edison Electric Institute, an association of shareholder-owned electric companies.