With the election coming up next Tuesday, I wanted to research some of Mitt Romney’s tax plan.
According to www.MittRomney.com, Mitt Romney will push to:
• Make permanent, across-the-board 20 percent cut in marginal rates
• Maintain current tax rates on interest, dividends, and capital gains
• Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
• Eliminate the Death Tax
• Repeal the Alternative Minimum Tax (AMT)
Yesterday I looked at making permanent, across-the-board 20% cut in marginal rates and found some inconsistencies. Today I want to look at maintaining current tax rates on interest, dividends, and capital gains.
The expiration in the Bush tax cuts slated for two months from now would increase the maximum long-term capital gain rate from 15% to 20%; and increase in the maximum rate applicable to qualified dividends from 15% to 39.6%. Interest would also increase with ordinary income tax rates.
A capital gain is the amount by which an asset’s selling price exceeds its initial purchase price in which a tax is assessed. I don’t think the increase in capital gains from 15% to 20% would have many ripples throughout the economy. I believe the biggest effect has already been realized due assets already being sold in anticipation of the increase in capital gains tax. Sale of Lucasfilms and 100’s of millions of savings anyone?
Dividends are a taxable payment declared by a company’s board of directors and given to its shareholders out of the company’s current or retained earnings, usually quarterly. They are divided into two categories for taxation: Qualified and Ordinary. Qualified dividends are dividends from domestic corporations and certain qualified foreign corporations which are currently taxed the special rate of 15%. Qualified dividends incentivize individuals and businesses to invest in the U.S. Ordinary dividends are all other dividends currently taxed at ordinary rates of between 0-35% depending on other factors.
Dividends are unique because they are generally profits of C-Corporation that have already been taxed up to a marginal rate of 39% or possibly 35% overall. Once they are received as a dividend by the individual, they are again taxed by at least 15% at 2012 levels. This means that $1 of profit is chopped to possibly .61 cents at the corporate level and then chopped to between .52 and .40 cents at the personal level. If our government increases tax on dividends even more, I think it only hurts what is in my opinion as the already limited incentive that exists.
All in all, I don’t see an increase in capital gains and interest as the end of the world. What I do think is that an increase in qualified capital gains from 15% to a maximum of 39.6% could be devastating to our economy and job creation. Because of what I have explained, I strongly support Mitt Romney’s Tax Plan to maintain current tax rates dividends, both ordinary and qualified.