President Obama doesn’t seem to care much for dividends. In his 2010 financial disclosure form, he and the First Lady showed $500,000 in a checking account, but only about 10% of their multi-million dollar wealth in equities. Now the President unveils a budget that would punish investors in dividend-paying stocks, jacking up the top dividend tax rate from 15% to 43.4%. How do you get 43.4? The top rate jumps to 39.6%, plus a 3.8% nonwage income tax, courtesy of Obamacare.
The timing is terrible. In a few years, baby boomers will be looking to dump stocks in order to get steady retirement income from bonds. We should be cutting dividend tax rates to keep boomers in the market, not shove them out. In a 2008 radio commentary on NPR, I pointed this out, as I did in my 1999 book Market Shock. Here’s the NPR transcript, and a link, if you’d like to hear my silky but over-caffeinated baritone.
Todd Buchholz: Ah, the boomers. It’s always the boomers. Their music, their nostalgia, their neuralgia. Those 76 million boomers, the generation that shouted, “Hell no, we won’t go,” is shouting it again. But they don’t mean Vietnam. They mean: “we’re not dying. And if someday we do pass away, well, we’re going to look great because we’re pumped up with Botox, breast implants and every antioxidant we can squeeze into a soy-milk latte.”
People who retired in 1950 on average lived another 12 years. Now that number has doubled. And when a baby boomer couple retires, odds are at least one of them will be smacking tennis balls into her 90s.
Which brings us to dividends. Serious scholars warn that we are careening toward a stock market crash in 2011, when the boomers start hitting age 65. Why? Because retiring boomers will need a steady income, beyond what they snatch from the Social Security pyramid scheme.
They will sell their stocks and jump into bonds, which will pay them a steady stream of income. But that may not be so good for the rest of us who would like to hang onto our equities.
How can we avoid this fearsome future? By keeping dividend taxes low.
Dividends can give boomers the regular stream they need to keep paying for their Pilates classes. Since 2003, dividends payments have climbed over 12 percent per year. With a low 15 percent dividend tax, companies pay out more cash.
But if Congress jacks up taxes on dividends, well, boomers will more likely dump their stocks, grab those bonds instead and go off to pasture dancing to that great boomer icon James Brown: “Papa’s Got a Brand New Bag.”
Of course, the rest of us will end up holding the old bag.