Unintended consequences of higher investment tax rates

As the December 31, 2012, deadline for the fiscal cliff rapidly approaches, tax rates on dividends and capital gains are scheduled to increase significantly. If lawmakers in Washington can’t reach a deal and the U.S. economy goes over the cliff, the top tax rate for dividends will skyrocket from 15 percent to 43.4 percent — a nearly 190 percent increase, while the top rate for capital gains will increase from 15 percent to 23.8 percent — a nearly 60 percent increase. It’s essential to maintain parity in the top tax rates for dividends and capital gains, otherwise our federal tax policy will distort investment decisions that would cause investors to retreat from dividend-paying stocks. 

These tax increases would also have a number of direct and indirect effects impacting not just the wealthy, but according to a recent study conducted by Ernst & Young, also impacting tens of millions of Americans at all income levels. Nearly tripling the dividend tax rate will threaten capital formation for companies across every major industry and have a negative impact on the U.S. stock market, reducing the value of dividend-paying stocks. This market drop would hurt millions of Americans who hold an interest in dividend stocks in their employer or union pension plans, 401(k) plans, individual retirement accounts, and life insurance policies — threatening retirement security for today’s seniors and the next generation of retirees. Americans who have saved all their lives to build reliable retirement income have already struggled enough in this fragile economy.
 
An increase in the tax rates on investments would also negatively impact many important sectors of the economy, including manufacturing, utilities, telecommunications firms, retailers, drug companies, and food producers that employ millions of Americans and are vital for economic growth, job creation and U.S. global competitiveness. According to a recent analysis by the American Consumer Institute Center for Citizen Research (ACI), an increase in tax rates on dividends and capital gains will reduce private investments by 6 percent, leading to the loss of nearly two million jobs. ACI didn’t even factor in the negative impact other tax increases and spending cuts included in the fiscal cliff would have on job creation, which according to the Congressional Budget Office, would drive the economy back into a recession next year and increase unemployment to 9 percent.
 
This is not the type of leadership the American people expect from Washington. The potential negative impact and unintended consequences of raising tax rates on investment income is a serious threat to the American economy and the American people and must be considered by lawmakers and policymakers before reaching a deal on the fiscal cliff. Millions of Americans’ jobs and economic prosperity depend on it. It’s time for members of both parties to come together to provide solutions to address our fiscal problems — but raising tax rates on investments is not one of them.

Kuhn is president of the Edison Electric Institute, the association of U.S. shareholder-owned electric companies.

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