Important Congress halts reversal of Bush tax cuts
With all that is going on in Washington, its sometimes tough to tell which issues will impact us the most here in Nevada. But one that is certain to impact your pocketbook is the potential tax hike on investment income.
In order to avoid the tax hike, Congress will have to make permanent our current policy of an equivalent 15 percent maximum tax on long-term capital gains and dividends. Congress has a unique opportunity to ensure this takes place, thereby protecting Nevada jobs, bringing stability to our still fragile financial markets, and ensuring that investors – especially seniors – will have access to the dividend income that they’ve come to rely on in order to make ends meet.
However, if Congress fails to act, Nevada taxpayers will be on the receiving end of an enormous tax hike – to the tune of 164 percent on the dividend rate for certain taxpayers. Such a dramatic hike will create two distinct and unnecessary economic problems.
First, these new high tax rates will hinder the economic recovery costing tens of thousands of jobs in Nevada and across the nation. Even President Obama’s top economic advisors have cautioned that increasing these rates would serve as a “highly contractionary” force to the economic recovery (Christina Romer).
Second, because tax rates for capital gains and dividends will no longer be equivalent, the current incentive to distribute meaningful dividends will be substantially diminished, according to the CATO Institute. So if the tax rate on dividends increases – even if it’s only for high earners – less dividend money will be paid out, hurting investors at all income levels.
What this means is that even if the tax rate is only increased for those in the top tax bracket, everyone will be affected. Because if companies start paying less dividends, that means that all investors (not just the rich) will receive a reduction in earnings from their investments.
Moreover, such a tax increase will hurt the market as a whole. A report by Barclay’s Capital found that letting the rates expire could drive down stock prices by as much as 8 percent. This drop would affect every American’s 401k or pension plan holdings. We do not need continued market instability.
And while lower dividend tax rates are important to the more than 27 million Americans who directly own dividend-paying stocks and the tens of millions of Americans who would see the value of their mutual funds, life insurance policies, IRAs, pension funds and 401(k) plans decrease, the tax increase would disproportionately hurt seniors.
Considering the potential negative consequences – job loss, market volatility, taking retirement income away from seniors – it’s hard to imagine why Congress wouldn’t extend these tax rates and prevent these negative consequences. Recent polls are telling our Congressional members that 61 percent wanted the tax cuts to continue. Only 29 percent wanted them to end. So by more than 2-1, Nevadans are telling Congress to extend these rates.
That’s why our Congressional leaders need to stand up for these Nevadans and ensure that they are protected. Those Americans who played by the rules, earned a paycheck and then invested that money in safe, dividend paying stocks should not be further punished economically. Neither should those who would lose their job or take a hit to their 401(k) because of the economic volatility that would result from an increase. In this tough economy, Nevadans and the Nation need a break and extending the current rates on capital gains and dividends is a good place to start.
Lynn Hettrick is former co-speaker of the Nevada State Assembly, where he represented Douglas County for 14 years.