Dividends and Taxes

So we are hearing a lot about the fiscal cliff these days. Part of it all is that we see Republicans telling us we must cut taxes for the wealthy, the “job creators“.

Let’s look at the results so far.

Bush 41 and Clinton raised taxes. Republicans told us that this would lead to the collapse of civlization. But I remember the economy being pretty good in the 1990s. Maybe it was the telecom bill, maybe it was the money spent on Y2K. But higher taxes did not cause us to be the United States of Chaos.

Then Bush 43 cut taxes. (You could say that he just postponed them.) Republicans told us that it would cause the USA to become a free market paradise. They said we would pay off the national debt. Republicans like to say the 1990s was just a bubble. The Aughts gave us a bigger bubble, and a bigger recession.

And now taxes must be cut for the “job creators”, who so far do not seem to want to create jobs, but have no problem spending money on elections. Lower taxes is great. But it is not a Magic Red Button that you can push to the exclusion of everything else. I really do not get why some people think it is the solution to all our problems. It certainly does not make the government spend less money.

It is the same people, the same ideology, the same predictions. I don’t want to go to the rates of the Eisenhower Administration, when they were 90%. But I think that taxes are not the Prime Mover Republicans seem to think it is. When their predictions do not come true, they complain that things are complicated, but somehow they should still be listened to. Then they turn around and make the same simplistic prediction.

Some people spend so much time and money complaining, lobbying, minimizing and lowering their taxes that I wonder how much money they could make if they spend all that time running their companies. Or teaching other people how to improve their lives.

So what does this have to do with dividends?

I am not too sure that higher taxes matter too much for dividend investors. First off, it’s passive income. It’s earned by someboy else. Complaining about something that is free can be unseemly. Spend that time spreading the good news of dividends. Plus mine are in IRA accounts, both rollover and Roth. I am not a lawyer or an accountant, but I think that money taken out of a rollover IRA or 401(k), then the money is taxed as regular income, regardless of what the asset is (stock, bond, mutual fund, cash). So this won’t affect me too much.

Capital gains taxes will be lower than dividend taxes. If different types of income are going to be taxed at different rates, I think that dividends should always be taxed at a rate lower than capital gains. We had two asset bubbles in a decade. Prices crashed, yet many stocks kept paying (and in some cases increased) their dividends. If you are counting on capital gains, you only get the benefit of owning stocks when you stop owning them. That’s kind of dumb.

I have noticed that a lot of companies are paying special dividends just in case. One of those companies is WalMart. This is making me think twice about investing in WMT. Some of these companies are incurring debt to pay these dividends. But it raises a question: if they can pay dividends before the new year, why weren’t they paying them before? They obviously do not need the money.

I do not think a lot of companies that have been increasing their dividends will cut them just because of taxes. Many companies have been paying dividends for over 100 years. Some have been increasing them for 20, 30, 40, even 50 years. They were doing this throught depression, wars, political turmoil, inflation, and higher taxes. So if a company was increasing their dividend in the 1990s, do you really think they are going to cut their dividends because they are going back to those rates? If they could raise their dividends then, they can raise them now.

Personally, I think we should look at whether or not different types of income should be taxed at other rates. Why not just have a progressive, bracketed flat tax?

Anyway, I do not know why some people are still pushing this line that simply cutting taxes are the answer to all our problems. Are they Lying For Feudalism, or are they just stupid?