A Congressional Budget Office (CBO) report predicts the nation could slide into a recession if the economy is allowed to go over the fiscal cliff. However, not fixing the problem correctly could do the same.
In the closing days of the year, less attention has focused on the pending increases in investment taxes, which are due to increase the top rates for dividends from 15 percent to 43.4 percent and capital gains from 15 percent to 23.8 percent. This increase will impact the economy two-fold -- it will lead to higher unemployment; and it will mean less income for consumers, including retirees.
The consequences of both impacts will be significant and potentially send the slow-growing economy back into an economic downturn, reducing the tax base and further fueling deficit spending. Several analyst reports show that the pending tax rise is already depressing stock prices -- some are even telling investors to sell now before a sell-off begins. Major corporations, including Costco, HCA, Murphy Oil and others, have chosen to pay dividends early -- some even taking on substantial debt to accommodate the payout.
Depressing stocks means less private investment, which means that fewer jobs will be created. Our latest study estimates that the increase in capital gains and dividend tax rates will reduce private investments by six percent and result in job losses totaling nearly two million. That is equivalent to adding one percent to the unemployment rate, similar to the CBO report.
And for current employees and retirees, the outlook isn't any brighter. Consumers with mutual funds, including retirees with tax-deferred retirement accounts, such as IRAs, 401(k)s and other retirement plans that mostly consist of stock mutual funds, will suffer a direct hit to their portfolios if the "after tax" value of those stocks decline as a result of tax increases. In other words, whether you hold stock in a taxable brokerage account or a retirement plan, the sharp tax increase means that stock prices will decline, and that decline will eventually be reflected in the value of your investments.
For consumers, the increases in tax rates will hurt all of us no matter our age, wealth or income. Since tax-deferred retirement accounts have had limitations on annual contributions, they are generally modest in size and cut across all demographic strata. In fact, an Oliver Wyman study sampled IRA accounts and found 40 percent to be less than $10,000 in value. Besides IRAs and 401(k) accounts, the increase in taxes on mutual funds would erode the value of savings across a broad spectrum of workers and retirees, potentially affecting their quality of life. One Ernst & Young study analyzed tax returns and found 63 percent of filers aged 50 years and over had qualified dividends, and 40 percent of filers with incomes less than $50,000 had qualified dividends.
Simply put: The increase in dividend taxes is not a tax on the rich.
Reducing savings, investment, income and jobs is a recipe for economic decline. Whether you are an investor, worker or a retiree, the pending increase could have serious consequences on you. If things aren't growing fast enough already, this tax increase will bring the U.S. economic to the brink of an economic recession, which will only reduce the tax base and complicate the urgent need to rein in the federal deficit.
With days remaining this year, there is a lot of work for Congress to do. For Americans and for the sake of economic growth and prosperity, getting the budget in fiscal order is imperative and represents the single-most important issue for policymakers. Congress and the president need to understand this calculus. Workers and consumers deserve better.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, an educational and research organization. For more information about the institute, visit www.theamericanconsumer.org.