The Dividend Tax Bill Arrives

As January 1^st, 2011 approaches Democrats in Congress are laying out their fiscal priorities. According to the Wall Street Journal, the Senate Budget Committee passed a fiscal 2011 budget resolution that includes an increase in the top tax rate on dividends to 39.6% from the current 15%—a 164% increase. This huge increase is much higher than the 20% rate President Obama proposed in his 2011 budget.

And that's only for starters. The recent health-care bill includes a 3.8% surcharge on all investment income, including dividends, beginning in 2013. This would nearly triple the top dividend rate to 43.4% in Mr. Obama's four years as President. We suppose the White House would call this another great victory for income equality.

But the driving impulse here isn't equity. It's money. According to the static revenue estimation rules that Congress lives by, maintaining the current 15% tax rate on capital gains and dividends will "cost" the government $347.7 billion over 10 years. The Congressional Budget Office hasn't broken out how much the higher 39.6% dividend rate alone would yield in revenue, but a reasonable guess is $200 billion. Congress simply wants that cash.

But this revenue estimate assumes businesses and investors are dumb and dumber. Dividends which are payouts from business earnings are already taxed once at the corporate rate of 35%. The individual dividend tax is a second levy on that same income and at a rate of 43.4% would take the total tax on each dollar paid in dividends to something like 60 cents.