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Taxes on Dividends to Triple?

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    Alan Viard of the American Enterprise Institute on dividend taxes.

  • Duration 4:43
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Speaking of what's in April low interest rates have made dividend stocks one of the hottest investment of this year -- one of the best investment from last year but.

My next guest -- taxes on that income could triple triple in just a few months Alan -- -- resident scholar with the American enterprise institute and joins us now.

-- Dividends is being tripled the tax rate walk us through the process how that's gonna happen.

Sure so right now dividends are taxed at a special 15% rate.

For high bracket taxpayers.

And that's part of a provision of the 2003 tax cut.

And it's scheduled to expire at the end of the year.

Now until recently -- Obama had steadfastly said.

That he wanted to largely but not completely extend that cut he said I want the dividend tax rates only go up to 20%.

-- he said that during the campaign said that in his first three annual budget plans.

But the budget plan that came out two weeks ago.

He didn't abrupt about face not advertised very prominently but talk the -- in the budget details -- -- -- -- 2003 tax cut to go away completely.

And that means that rate goes up not from fifteen to twenty but from fifteen to thirty -- point sex.

And then there's a couple other provisions there's -- one point two percentage point increase.

-- for a while John -- -- out before we get the that I am trying to digest that I mean we're not talking about it.

Fifteen to almost 40%.

Tax rate on on on these dividends.

That will now -- would that would that in fact everyone getting their dividends are just certain segments of the population.

The tax increase would directly apply only to higher bracket stockholders what are we talking -- us what what what's -- we'll come right compass people.

For married couples people -- adjusted gross income above 267000.

Dollars or thereabouts next year.

OK now that's one that obviously you're gigantic tax hike let's talk about the rest of -- -- -- yes -- there's no another one point two percentage points that come in because there's a deduction phase out.

For high income people that also was taken away by the bush tax cuts but under the president's proposals would come back.

And then there's another provision that people just don't know about it doesn't just applied to dividends.

It's the unearned income Medicare contribution tax was adopted as part of the Health Care Reform law -- without any congressional hearings on it.

And it would be a three point 8% tax on dividends and interest and capital gains of high income people -- -- in the one point two yet in the three point eight.

On top of -- nine point six and you're all in rate is 44 point six of the top.

You know I hate that term on earned income.

I mean at some point you have to money to make the investments that you were already tacked on -- money -- you're earning yet now we're talking about taking out.

-- well over 40% of what you might kid in -- return -- investment what's the key people that why would people even invest anymore.

Why it's certainly gonna drive down the value of stocks because obviously people invest in stocks in large part to receive.

Dividend income and you're here gonna have a much bigger slice of that dividend income tax the way.

So -- I see an impact down went and sought prices -- to -- an impact.

Harming investment.

And also be an encouragement for firms to borrow to issue debt.

To finance their investment instead of issuing stock where the dividends are gonna face this -- these higher taxes.

So corporations -- figure out a way around them but may be smaller individuals certainly smaller businesses or households that's of the file small business that the files individuals are.

There's probably no way around the for them -- What does actually does only a played only a within the dividend tax only applied to dividends paid.

By the C corporations the 100 subject to the corporate income tax just won't apply to the pass through businesses where attacks on the individual returns Alan.

Is there any way any of this can be -- -- who obviously you've got the election coming up we've got a lot of negotiations that are gonna happen at the end of the year with the payroll tax cut that sense in.

Anyway this is avoidable some of it.

It is avoidable but only if congress acts affirmatively to block it.

Because the bush tax cuts are scheduled to expire at the end of the year.

Automatically if nothing is done and if that occurs then all of these things do take place in what the president is really proposing in a sense.

Is just to let the scheduled expiration.

Go ahead and take full effect all right and so it's gonna actually take a new law by congress actually -- part or all of this increase I -- Only -- these guys understand what kind of damage this is like the sword of -- I've really hope they understand what kind of damage this could be.

Our country needs investments -- in investors and this is just -- -- This just too much -- that you are already taking a risk but they have this much money taken from -- from that risk is outrageous Alan B -- really appreciate American Enterprise Institute thank you back to bring.

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