Opinion: Tax hikes will exact steep price

If current law goes into effect, consider the changes that 2013 will bring:

Payroll taxes will increase by $120 billion; bonus depreciation will end, adding $64 billion in taxes; the Affordable Care Act, also known as ObamaCare, will kick in, adding $46 billion in taxes; the tax cuts will end for upper-income Americans, increasing taxes by $83 billion; the tax cuts will end for middle-income Americans, increasing taxes by $198 billion.

The likely consequences are obvious. Such a massive increase in taxes will lead to a significant slowdown in the economy as investment and disposable income both drop dramatically. People and businesses will have to retrench in order to deal with these higher taxes.

This will result in less economic activity and potentially less revenue for the federal government. The opportunity to partly address deficit problems through economic growth will be lessened, and this will ensure that our deficits and debt situation will continue to grow and become even more of a drag on our prosperity and national culture.

Yet along with these evident effects of the tax increase gluttony, there will also be a number of very significant occurrences that have, so far, gone unnoticed or at least not discussed — especially by this administration, which is so enamored of taxing more people at higher rates to support its massive expansion in the size of the federal government.

First, under the Obama plan, the tax on dividend income will jump to a record high. It will go from 15 percent to a new top rate of 43.4 percent. This will create numerous unintended consequences that will pervert investment decisions and drive down economic activity.

For people who are retired and living on a fixed income, it will mean a massive adjustment. This is especially pernicious as we head into a time when the largest generation in American history, comprised of the so-called baby boomers, is moving into retirement. This is the first generation in history to retire depending primarily not on defined benefit plans but rather on contribution plans that are disproportionately comprised of dividend income.

Thus this generation, aging out of alternative ways to generate income, will find itself being socked with a tax increase promoted by the left as a prerequisite for “fairness.” It will be a bitter pill to swallow for a lot of people whose only pathway to adjusting to their reduced income will be through a commensurate reduction in their standard of living — and all this to feed the left’s insatiable appetite for a large and more costly government.

In addition, the tax on capital gains will go from 15 percent to 23.8 percent. It is also fairly certain that the new 3.8 percent tax on passive income will take effect. Both of these changes will further retard any possibility of economic expansion.

We must also consider the effect that these tax increases on capital gains and especially dividends will have on stocks. Companies that pay dividends have seen their stock price surge amid the extremely low interest rates of the last few years, for the simple reason that people have sought a better return through dividends.

These companies are going to see their stock prices come under pressure. The attractiveness of investing in dividend-paying stocks will be significantly muted when the tax rate on those dividends jumps from 15 percent to as high as 43.4 percent.

Thus the baby boom generation takes a double hit.  First, income is impacted by the higher tax on their dividends; second, the value of their portfolio is reduced due to the fall in the value of dividend-paying stocks.

All this will lead to a further contraction in economic activity by a generation that has lost considerable spending and savings power through the simple act of getting old. This cannot be good for the nation or the economy as a whole.

When the tax man cometh, he brings with him a whole array of unintended consequences.

Judd Gregg is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and as ranking member of the Senate Appropriations subcommittee on Foreign Operations. He also is an international adviser to Goldman Sachs.