My Interview With the President
Over the past few months, I’ve appeared in the national media and written extensively about the fiscal cliff’s impact on dividend investors.
I’m no fan of taxes and curse like an eighth grader in a cursing competition every April 15. But I’ve crunched the numbers, and while I’m not happy about having to pay higher taxes on dividend investments in 2013, if the President raises taxes on dividends to ordinary income rates, it doesn’t mean doom for dividend investments.
Still, I’d love to be able to challenge the President on this policy. And I almost did.
Twice in the past two days, I was oh, so close to asking President Obama questions about the fiscal cliff.
On Monday, the President had a Twitter chat where he answered questions from citizens. I posed one about dividends and while he didn’t get around to it, I’m sure he considered it carefully before answering questions about student loans and budget cuts.
Yesterday, I was on Bloomberg Radio talking about dividends and the fiscal cliff. My interview was pushed back 15 minutes from its scheduled time because Bloomberg had a one-on-one interview with the President.
So, it was almost like we were on the same segment.
Here is how I believe the interview would have gone, if I had the chance to sit down with President Obama:
Marc Lichtenfeld: Mr. President, I’d like to spend our time today talking about dividends. As you may be aware, I wrote a book called Get Rich with Dividends, and…
Barack Obama: Of course I’m aware of it Marc. I’ve already read it. I only have four more years of salaried income. I need to start investing for retirement. Plus, I bought one each for Malia and Sasha. It makes a great gift and it’s never too early to get kids thinking about investing for the long term.
ML: Thanks for the plug, Mr. President. Now, let’s talk dividends. Currently, your plan is to tax dividends at ordinary income rates. Plus, there will be an additional 3.8% surtax on investment income and capital gains on those with modified adjusted income of $200,000 for individuals and $250,000 for married couples. The surtax will help pay for Medicare.
You believe the top 2% needs to pay more taxes. But what about the other non-top 2% that derives income and capital gains from their investments? Won’t raising the taxes on investments hurt them?
BO: Well, many investors keep their income producing investments in Individual Retirement Accounts (IRAs), which are tax-deferred, so those investors will not be impacted. Investors who have IRAs should make sure their investments are as tax efficient as possible. Consider putting your investments that generate taxable income into an IRA.
Capital gains will likely be taxed at a lower rate, so it probably makes sense to have those in your taxable accounts if you don’t have room in your tax-deferred accounts.
ML: Many investors are concerned that if taxes on dividends go higher, dividend-paying stocks are going to get crushed. What say you?
BO: I don’t have a crystal ball when it comes to the markets and obviously I can’t make any guarantees, but there is simply no historical correlation between higher taxes on dividends and lower stock market returns. You wrote about this in Wealthy Retirement. You showed that stocks outperformed by over five percentage points annually when dividends were fully taxable.
There have been many other studies that confirm this, including a recent one out of Bank of America that show that stocks with high dividend yields got cheaper on a price-to-book basis during the past 10 years of 15% tax rate on dividends, not more pricey as you’d expect.
ML: How about the 43.4% top rate that the wealthiest investors will pay on their dividends, that’s awfully high, isn’t it?
BO: The 43.4% top tax rate on dividends is designed to make sure that the wealthiest Americans, particularly those who derive most of their income from investments, pay their fair share.
The majority of investors won’t pay anywhere near 43.4%. And that 3.8% surtax we talked about earlier, is only applied on levels above certain thresholds, not on all of the income. For example, a husband and wife whose adjusted gross income is $150,000 from jobs and $50,000 from income won’t pay the 3.8% surtax. If they made $200,000 from their jobs or business and $100,000 in investment income, they would pay the 3.8% surtax on $50,000 of investment income ($300,000 minus $250,000 threshold).
Same thing with the tax rate. They’ll only pay the top tax rate on money earned above certain thresholds. All of the money earned below those thresholds is taxed at lower rates.
ML: Still, 43.4% is pretty high and doesn’t it amount to double taxation?
BO: If you’re talking about converting to a flat tax or consumption tax, good luck with that. I don’t see it happening under my administration or anyone else’s – even a Republican’s.
And don’t forget, dividends had been taxed at ordinary income tax rates for nearly 50 years. And over that time, the market gained an average of 7.6% annually versus 4.5% over the past 10 years of 15% rates on dividends. During Eisenhower’s administration, dividend taxes were as high as 91%. It was only during the past 10 years that dividend taxes were reduced – and as you showed in another Wealthy Retirement article, even after taxes, stocks and especially dividend-paying stocks had a greater total return for investors during those higher tax years than during years when dividends were taxed at just 15%.
ML: Thank you, Mr. President for taking the time to talk with me today.
BO: My pleasure Marc. You know I never miss an issue of Investment U or Wealthy Retirement.