On the Way: Massive Tax Hikes on Investors

You’ve probably heard that coming in 2011 are massive tax increases as a result of the expiring Bush tax cuts. The top rate on ordinary income is slated to go from 35% to 39.6%, etc.
But that’s not the worst of it. The tax applied to dividends could nearly triple (for the highest income earners) from the current 15% rate.
Congress may act to prevent the dividend rate from soaring all the way up to the presumed new top ordinary income rate of 39.6%. President Obama has claimed he favors only a modest increase of the dividend and capital gains rate to 20%. It would take an act of Congress, though, to prevent the rate on dividends from rising all the way to 39.6%.
Trying to predict what will emerge from any tax legislation (that most members of Congress won’t bother to read) is a bit like trying to predict the outcome of horse races. The illogical, constantly expanding, and ever-changing nature of the maddening mess that is our tax code makes long-term financial planning something of a gamble.
In a worst-case (so far as we know) scenario, by 2013 the dividend tax rate would rise effectively to 44.6% from the current 15%. That’s because in 2011 a rule that ostensibly limits deductions (but for the majority of taxpayers is nothing but a boost in their tax bracket) adds 1.2 percentage points. And in 2013, the IRS will begin collecting a 3.8% Medicare surtax on investment income. All of this would be on top of the regular rate on dividends (which could be as high as 39.6%).
Think you won’t be hurt by such a dramatic tax increase because you are in the lower tax brackets and/or your investments are in 401(k)s and IRAs? Think again.
Higher tax rates on dividends will discourage corporations from increasing their dividends and will drive tax-conscious investors out of dividend-paying stocks. The likely result, according to Forbes editor William Baldwin: Stocks and other income-generating assets will fall in value.
Higher Interest Rates Would
Make Government’s Financial Crisis Much Worse
Oliver N. writes: Do you think the interest charged governments is the reason for the huge deficits? You have the best newsletter that I’ve seen by far. Thanks again.
Without a doubt, the exceptionally low rates of interest are enabling government to take on a much larger level of debt than it would be able to do in more normal times. But by borrowing 40 cents out of every dollar it spends, the federal government is saddling future taxpayers with the burden of enormous debt servicing costs – even assuming interest rates rise only modestly from here.
The notoriously optimistic Congressional Budget Office projects that by 2017, interest payments on the national debt will balloon to $650 billion – a bigger share of the federal budget than all non-defense discretionary spending combined. Before that point, though, Congressional spending addicts will likely have already doomed the nation to either an outright default or (more likely) a massive inflationary spiral that will prolong and extend our indebtedness and wreck the currency in the process.