Capital Gains Tax Rate
Posted: December 14, 2012
I thought it was amusing this week when I learned that Jim Senegal, the former Costco Wholesale Corp. CEO and company co-founder who spoke at the Democratic Party Convention for President Obama this fall, decided to give his company's shareholders a $3 billion Christmas gift in the form of a special dividend of $7 per share. In fact, Costco is one of more than 175 companies who have announced special dividends this month in advance of the possible expiration of the Bush-era tax rates.
If Congress does nothing about the capital gains tax rates before the end of the month, the tax rate will rise from 15 percent to more than 20 percent for the average investor. For those earning more than $250,000 this year, the effective capital gains tax rate will increase to 39.6 percent. If the ObamaCare surcharge is included, all taxpayers can add another 3.8 percent to the tax rate.
In 1986, the last time the capital gains tax was increased, investors cashed out to receive their dividends and avoid a higher tax. The tax revenue from capital gains in 1986 skyrocketed to $52.9 billion before falling below $34 billion the following year. For the next decade, capital gains tax revenue stayed relatively flat until the rate was dropped down again during the Bill Clinton era in 1997.
The argument for keeping the capital gains tax rate at 15 percent is that corporate income is already taxed once at the company level. The politicians who favor an increase in the capital gains tax rate usually want to finance more government spending.
In the long term, however, fewer companies will likely pay dividends or increase the dividends that they currently pay out if the capital gains tax rate goes up by a sizeable percentage. Consequently, what will happen to the government's revenue stream if investors are not earning as much dividend income?
The funny part about the Costco story is that Sinegal, who owns two million shares of his former company, avoids nearly $4 million in taxable income because of his early holiday gift to shareholders. Plus, Costco borrowed $3.5 billion to assist with its $3 billion special dividend payout.
So don't be surprised if the federal government reaps a proportionately higher amount of capital gains in 2012. But the question is, "What will happen in the future if the Bush-era tax rates expire?"
The moral of the story is that if government taxes something, it will get less of it.