Without action from Congress, the Obama tax hikes are set to take effect January 1, 2011. However, this doesn’t mean businesses are waiting until then to prepare for the potential impact. In fact, the uncertainty surrounding the tax increases is already holding back potential job growth.
Today’s Wall Street Journal points out, “The uncertainty over looming tax increases is starting to affect both investing and corporate decision making. … Small-business owners say unease about tax policy, along with the economy, has led them to hold off on hiring and investment.”
Specifically, President Obama has proposed allowing taxes on dividends and capital gains to jump to 20 percent from the current level of 15 percent. If Congress fails to act at all, the tax rate will rise to the pre-2003 level of 39.6 percent, an increase of 164 percent in a single year.
Tax hikes such as these should be alarming to most Americans for several key reasons.
First, as Heritage Foundation Senior Tax Policy Analyst Curtis Dubay recently wrote, “[Increased dividend taxes] will not only hurt American companies, but penalize America’s senior citizens. Older people hold the most stock of any demographic group, and often rely heavily on dividends to supplement Social Security income.”
Second, uncertainty negatively affects business decision making. Ken Keith, owner of a firm that works with small businesses, explained in The Wall Street Journal, “It’s like a deer in headlights. Nobody is doing much of anything about expanding or hiring or investing in new equipment.” Small businesses, which employ 25 percent of Americans, could be among the hardest hit by the Obama tax hike. Unfortunately, many of these job-creating businesses are being forced to wait and see how their businesses will be impacted rather than risk new hiring now.
Finally, as Rea Hederman and Patrick Tyrrell note in their recently released Heritage Foundation Backgrounder:
With President Obama’s tax hikes scheduled to start at the end of this year, the top tax rates on qualified dividends will almost triple from 15 percent to 39.6 percent on January 1, 2011. Dividend payments will be taxed at a much higher rate than capital gains, which will create distortions of how companies return value to shareholders. This tax policy favors capital gains distributions and penalizes companies that return value to shareholders through dividends.
There is no argument for raising taxes in a weak economy, whether through dividend taxes, corporate taxes, personal income taxes, or otherwise. While pitting Americans of different socioeconomic classes against each other may make for good politics in an election year, it does little to create jobs for unemployed Americans. If the President is serious about long-term job and economic growth, he would say no to any tax increase and support the permanent extension of all current tax rates now.