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Would Raising Taxes On Investment Income Hurt The Economy?

Nov 29, 2012
Originally published on November 29, 2012 9:53 pm

As Democratic and Republican leaders try to work out a deal to avoid the automatic spending cuts and tax increases of the fiscal cliff, one area they're zeroing in on is investment income.

Raising the rates on capital gains and dividends, even just for the wealthy, would bring in $240 billion over the next decade. That makes them an easy place to look for new revenue.

Kent Harvey would like President Obama and Congress to look somewhere else.

Harvey, the chief financial officer at California power company Pacific Gas and Electric, was walking the halls of the Capitol earlier this week, trying to convince members of Congress that raising taxes on dividends would be a very bad idea.

"It's the No. 1 issue for the utility industry," he said.

If Obama gets what he wants in the fiscal cliff negotiations, capital gains would go from being taxed at 15 percent to more than 20 percent for high-income Americans. And dividends would go from that same 15 percent rate to more than 39 percent.

Harvey says this would turn investors off of companies that offer dividends and hurt stock prices. Utilities depend on their dividends to attract investors, including senior citizens.

Which brings us to Fred and Eleanor.

They're the stars of an ad that's part of a multimillion-dollar campaign funded by utilities and other companies under the name Defend My Dividend.

In the ad, Fred tells Eleanor that "the rate on our dividends would more than double."

"But we depend on our dividends to help pay our bills," she protests. "We worked hard to save."

Actually, under the president's proposal, the taxes on Fred and Eleanor's dividends would more than double only if their combined income was more than $250,000 a year.

Roberton Williams of the Tax Policy Center says most seniors don't have much to worry about.

"The concern about elderly who rely on dividends and capital gains for their income has no basis," Williams says. "If they're high income, yes, their taxes will go up. But they're not going to be having to eat dog food."

But if Congress and the president fail to reach a deal, taxes on investment income would rise for everyone, not just the wealthy.

So, what would higher capital gains and dividend taxes mean for the broader economy?

"I think this is one of the reasons why we've seen some concerns expressed in the stock market since the president was re-elected," says Randy Kroszner, a professor of economics at the University of Chicago. "A significant spike in capital gains and dividends taxes would reduce the value of equities."

And, he says, if stock prices go down, companies will have less money to invest in equipment and even employees. It's not a straight line, but Kroszner says raising these taxes could hurt the economy.

"It's not just a tax on the wealthy. It's a tax on the productive capacity of the economy," Kroszner says.

Princeton economist Alan Blinder isn't as worried. He says that when these taxes were lowered, he didn't see strong effects on the positive side — at least not as significant as you might expect.

"I see the evidence as very mixed and certainly, certainly not pointing strongly to a powerful negative," he says.

Blinder says in some instances raising these rates will hurt, but he doesn't expect it to be hugely disruptive. And as with most questions of economics, the policy debate will probably long outlast this political fight.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

MELISSA BLOCK, HOST:

And I'm Melissa Block. On Capitol Hill today, Treasury Secretary Timothy Geithner met with Democratic and Republican leaders. It's the latest effort to avoid the automatic spending cuts and tax increases set to take effect in the New Year. What Geithner brought was a proposal strikingly similar to the president's budget unveiled months ago. According to a Republican congressional aide, the offer included $1.6 trillion in tax increases, mostly on the wealthy, and 400 billion in spending cuts. The administration also asked for more stimulus spending and the ability to raise the debt limit without getting permission from Congress first. Well, today's offer from the White House did not go over well with Republicans.

SIEGEL: After his meeting with Geithner, House Speaker John Boehner said he was disappointed.

REPRESENTATIVE JOHN BOEHNER: I'm here seriously trying to resolve it. And I would hope the White House would get serious as well.

SIEGEL: In the coming days, NPR is looking at the tax part of these complicated negotiations. Here's Tamara Keith on the political wrangling over investment income.

TAMARA KEITH, BYLINE: Raising the rates on capital gains and dividends, even just for the wealthy, would bring in $240 billion over the next decade, which makes them an easy place to look for new revenue. Kent Harvey would like the president and Congress to look somewhere else.

KENT HARVEY: So we are going to an office of a California member.

KEITH: Harvey is the chief financial officer at PG&E, the power company in northern California. He was walking the halls of the Capitol earlier this week trying to convince members of Congress that raising taxes on dividends would be a very bad idea.

HARVEY: It's the number one issue for the utility industry.

KEITH: If President Obama gets what he wants in the fiscal cliff negotiations, for high income people, capital gains would go from being taxed at 15 percent to more than 20 percent. And dividends would go from that same 15 percent rate to more than 39 percent. Harvey says this would turn investors off of companies that offer dividends and hurt stock prices. Utilities depend on their dividends to attract investors, including senior citizens.

(SOUNDBITE OF COMMERCIAL)

FRED: You see this?

ELEANOR: So let me guess, more Washington gridlock.

FRED: No, it's First Look.

KEITH: In come Fred and Eleanor. This ad is part of a multi-million dollar campaign funded by utilities and other companies under the name Defend My Dividends.

(SOUNDBITE OF COMMERCIAL)

FRED: The rate on our dividends would more than double.

ELEANOR: But we depend on our dividends to help pay our bills. We worked hard to save.

KEITH: Actually, under the president's proposal, the taxes on Fred and Eleanor's dividends would more than double only if their combined income was more than $250,000 a year. Roberton Williams, of the Tax Policy Center, says most seniors don't have much to worry about.

ROBERTON WILLIAMS: The concern about elderly who rely on dividends and capital gains for their income has no basis. If they're high income, yes, their taxes will go up, but they're not going to be having to eat dog food.

KEITH: But if Congress and the president fail to reach a deal, taxes on investment income would rise for everyone and not just the wealthy. So what would higher capital gains and dividend taxes mean for the broader economy? Randy Kroszner is professor of economics at the University of Chicago.

RANDALL KROSZNER: I think this is one of the reasons why we've seen some concerns expressed in the stock market since the president was reelected. A significant spike in capital gains and dividends taxes would reduce the value of equities.

KEITH: And he says if stock prices go down, companies will have less money to invest in equipment and even employees. It's not a straight line, but Kroszner says raising these taxes could hurt the economy.

KROSZNER: It's not just a tax on the wealthy. It's a tax on the productive capacity of the economy.

KEITH: Princeton economist Alan Blinder isn't as worried. He says when these taxes were lowered, he didn't see strong effects on the positive side, at least not as significant as you might expect.

ALAN BLINDER: I see the evidence as very mixed and certainly, certainly not pointing strongly to a powerful negative.

KEITH: Blinder says in some instances, raising these rates will hurt, but he doesn't expect it to be hugely disruptive. And as with most questions of economics, the policy debate will probably long outlast this political fight. Tamara Keith, NPR News, the Capitol. Transcript provided by NPR, Copyright NPR.