Don't change rates on capital gains and dividends

Congressional tax-writing committees are scheduled to hold a rare joint hearing Thursday to discuss an important, timely issue – the taxation of capital gains. The current 15 percent tax rate on capital gains income expires in January, part of a host of tax increases that will hit millions of American taxpayers and businesses if we go over the fiscal cliff. This week’s hearing should help spur lawmakers into action to avoid the fiscal cliff and the damage it will inflict on our economy.

In 2003, Congress and the president took two important steps to boost economic growth. First, they lowered the maximum rate on capital gains to 15 percent. Second, they tied capital gains and dividend income together, lowering the rate on dividends from the top income tax rate to 15 percent. These rates expire in 2013 – increasing the capital gains tax from 15 percent to 20 percent and more than doubling the top dividend rate from 15 percent to 39.6 percent. In addition, beginning in 2013 investment income will be subject to an additional Medicare HI tax of 3.8 percent, raising the top rate on dividend income from 39.6 to 43.4 percent and capital gains to 23.8 percent.
 
This could have a significantly negative impact on economic growth. According to the Heritage Foundation, higher investment tax rates would lead to 270,000 fewer jobs in 2018.

In addition to harming the economy, the impact of capital gains tax increases would be borne by millions of Americans, across all income levels.  According to IRS data, in 2009, more than three million returns with long-term capital gains were filed. Sixty-two percent of those returns were from taxpayers with adjusted gross income of less than $100,000.
 
American farmers and ranchers would be disproportionally impacted by capital gains tax increases. Nationwide, 40 percent of all agricultural producers report some capital gains; nearly double the share for all taxpayers. The average amount of capital gain reported by farmers is about 50 percent higher than the average capital gain reported by other taxpayers. The impact of capital gains taxes on farming and ranching is also significant because production agriculture requires large investments in land and buildings that are held for long periods of time.

Higher capital gains taxes also make the U.S. less competitive. According to a report by Ernst & Young, the U.S. capital gains tax rate compares unfavorably with that of many other major economies. Even with current rates, more than half of the countries surveyed have individual capital gains tax rates lower than that of the U.S. Allowing rates to increase would undermine efforts to keep the U.S competitive with our trading partners.

The same is true for dividend tax rates. While they are not the focus of the joint hearing, the looming tax increase is a growing concern for millions of taxpayers who hold dividend-paying stocks.

According to the bipartisan Tax Foundation, raising dividend tax rates will disadvantage the largest dividend-paying companies and could reduce the level of dividends paid to shareholders. If this happens, all taxpayers who receive dividend income would be affected, regardless of their income level.
 
Lower investment tax rates don’t just benefit direct shareholders; they benefit the tens of millions of Americans who own stock indirectly through mutual funds and the value of stock held through life insurance policies, pension funds or 401(k) plans.
 
According to IRS data, older Americans and those saving for retirement would be disproportionately hurt by a tax increase on capital gains income. For 2009, among taxpayers with qualified dividend income, 63 percent were over the age of 50 and 68 percent were from returns with incomes of less than $100,000. 
 
Higher taxes on investment income disproportionately affect seniors, farmers and ranchers, and manufacturers, and will directly impact middle class taxpayers. Undoubtedly, this looming tax increase on investment income will affect asset values. The market may even begin to price in the expiration of current rates months in advance. As the committee considers efforts to improve the tax code and promote economic growth, we urge members to maintain current low rates on both capital gains and dividends.
 
McCrery is a former Republican congressman from Louisiana who served as ranking member of the House Ways Means Committee. He is now manager of the Alliance for Savings and Investment (ASI)

---