Will tax reform dollars come from higher rate on capital gains and dividends?

A 4/3/13 article in Politico, "Investment tax rate poses dilemma for the GOP," raises the issue of whether lawmakers will increase the tax rate on capital gains and qualified dividends to help pay for tax reform that lowers the overall tax rates for individuals and corporations. They note that this could generate "gobs of money." I think that is a good way to put it.

If you look at where funds could be generated to pay for lower tax rates in a revenue neutral tax reform bill, there are some obvious choices. These choices are the larger tax expenditures - exclusions such as for employer-provided health insurance, the mortgage interest deduction, and the lower rate on capital gains and dividends. For example, repeal of LIFO is estimated to generate about $7 billion per year. In contrast, a higher capital gains rate might generate $3 billion and a higher rate on dividends $7 billion. I'm estimating these amounts based on some figures in President Obama's FY2013 Greenbook. He had also proposed capping itemized deductions and some exclusions at 28% which using 2001/2003 rates, would have generated $58 billion per year.  And there is another factor to consider. Repeal of LIFO or slowing down depreciation are changes that are just timing. Over the long term, they really don't generate revenue. However, raising the rate on capital gains and dividends and capping the benefit of deductions and exclusions are permanent dollars.

I think Congress will have to look at revenue that can be generated from individual tax changes to help pay for a corporate rate reduction. Some of that change should also help fund a lower individual tax rate.

What do you think?

Tax rate on dividends and job creation

Today's Politico (5/10/12) has an opinion letter to Treasury Secretary Geithner from 18 CEOs asking the Administration to not support increasing the tax rate on dividends ("CEOs: Don’t raise taxes on dividends").  Currently, qualified dividends are taxed at capital gains rates (15%) rather than as ordinary income. This special treatment expires at the end of the year as do the lower regular and capital gains rates. So starting January 2013, the top tax rate possible on qualified dividends is 39.6% (plus an extra 3.8% new Medicare tax that starts in 2013 for upper income individuals).

I find this statement in the CEO letter confusing: "The administration’s plan to increase the top tax rate on dividends from 15 percent to 39.6 percent in 2013 will very likely have a seriously disruptive effect on this economic sector, reducing the incentive to pay dividends."

So, corporations won't have an "incentive" to pay dividends if the shareholders are in a 39.6% tax bracket?  Don't corporations pay dividends because they have earnings to share with shareholders?  What about the shareholders who are not in the 39.6% bracket (that top rate applies to less than 2% of individuals)?  What about corporate shareholders who also get a dividends received deduction?

The CEOs also say the higher tax rate will hurt seniors many of whom depend on investment income to make ends meet. Wow!  That is only a small percentage of senior who likely even get an appreciable amount of dividend income and if it is a lot of dividend income, they must have large portfolios?  Why should they get a lower rate on that income?  If any seniors are relying on their dividend income to make ends meet, they are not in a 39.6% bracket, and perhaps might even be in a 15% bracket.  And if they are really struggling to make ends meet, they probably don't even have an investment portfolio.  Wow!

And the letter notes that the lower rate is also important for competition and job creation!  Shareholders use dividend income to create jobs!?  

It is troubling to see this letter as it makes odd statements that distract from what is really needed to improve the tax law.  Why don't they be bold and talk about corporate integration - taxing corporate income once and creating a system that will allow for that.

What do you think?