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All Things Considered

Nov 29, 2012 BY Tamara Keith

Would Raising Taxes On Investment Income Hurt The Economy?

A screen grab from an ad by the Defend My Dividend campaign, which is funded by utilities and other companies. They don't support a proposed increase in taxes from investment income.
A screen grab from an ad by the Defend My Dividend campaign, which is funded by utilities and other companies. They don't support a proposed increase in taxes from investment income.

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 2014 NPR. To see more, visit http://www.npr.org/.

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