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Home » Taxes

Expiration of Bush Tax Cuts? Romney Vs. Obama on Dividend & Capital Gains Tax Rates

Last updated by on 11 Comments

One of the most hotly debated political issues of the last few years has been on whether or not the Bush Era tax cuts on dividend and capital gains tax rates should continue or expire. As it currently stands, the Bush tax cuts (which were extended by the Obama tax cut plan in 2010) would expire at the end of 2012.

This has a huge impact on anyone with a taxable investment account.

What I plan to do here is lay out the facts on what the taxes are, what they could become, and who it impacts the most, vs. making any kind of political statement. I’ll leave that up to you in the comments.

The reality is that the outcome of this election will go a long ways towards determining if the tax cuts are extended further. It is clear what each side would like to do with dividend and capital gains taxes:

  • bush tax cutsObama and democrats would like to see the tax cuts extended for families earning less than $200,000 per year.
  • Romney and republicans would like to see the tax cuts extended to everyone, including those earning over $200,000 per year, and VP candidate Ryan has proposed eliminating the capital gains, dividend, and interest taxes completely.

2012 Capital Gains & Qualified Dividend Tax Rates

Let’s first take a look at the capital gains tax rate table under the Bush tax cuts and Obama extension:

Ordinary Tax RateShort-Term Capital Gains Tax Rate (held <1 year)Long-Term Capital Gains Tax Rate (held 1+ year) & Qualified Dividends Tax Rate
10%10%0%
15%15%0%
25%25%15%
28%28%15%
33%33%15%
35%35%15%

Extending the tax cuts to everyone would have the strongest impact on the tax rate paid by the wealthiest individuals.

Looking at each candidate’s 2011 tax returns gives a clear depiction of this, in action.

Obama and Romney Tax Returns & Effective Tax Rates

Obama’s tax return claimed $789,674 in income. Of the income, $400,000 was salary, and the rest was book sale royalties. Total taxes paid were $162,074. This resulted in an effective tax rate of 20.5%.

Romney’s tax return claimed $13,696,951 in income (about 17.4X Obama’s income). Of that, zero was wages/salary, while $6,810,176 was capital gains, $3,649,567 was dividends. Total taxes paid were $1,935,708. This resulted in an effective income tax rate of 14.1%.

How was Romney able to pay that low of a tax rate when the tax brackets top out at 35% on income over $388,350?

The Bush era tax cuts.

The Primary Benefactors of a Capital Gains Tax Cut

The Bush tax cuts set the maximum tax rate on long-term capital gains and qualified dividends to 15%. Romney was able to start there and go below 15% through tax deductions.

Where do most capital gains come from? Over the past 20 years, more than 80% of the capital gains income realized in the United States has gone to the wealthiest 5% of taxpayers, while 50% of all the capital gains have gone to the wealthiest 0.1% of taxpayers.

Yahoo states, “The top 0.1%– about 315,000 individuals out of 315 million– are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.”

Paul Ryan, Romney’s running mate proposes taking it a step further in his Roadmap for America’s Future budget plan. He would eliminate capital gains, dividends, and interest tax completely. Looked at retroactively, this would effectively have given an effective tax rate of close to 0% on Romney’s $13.7 million in income in 2011. In 2010, Romney would have paid $177,650 out of a taxable income of $21,661,344, for an effective tax rate of 0.82%.

Republicans argue that reducing the capital gains and dividend tax rates on American’s wealthiest spurs investment.

Capital Gains Taxes in 2013

As stated earlier:

  • Obama and democrats would like to see the tax cuts extended for families earning less than $200,000 per year.
  • Romney and republicans would like to see the tax cuts extended to everyone, including those earning over $200,000 per year, and VP candidate Ryan has proposed eliminating the capital gains, dividend, and interest taxes completely.

As it stands right now, without a Democratic and Republican agreement, it is likely that the Bush tax cuts would simply expire at the end of 2012 and revert to pre-tax cut rates. They would then look like this:

Ordinary Tax RateShort-Term Capital Gains Tax Rate (held <1 year)Ordinary & Qualified Dividend Tax RateLong-Term Capital Gains Tax Rate (held 1+ year)5-Year Capital Gains Tax Rate
15%15%15%10%8%
28%28%28%20%18%
31%31%31%20%18%
36%36%36%20%18%
39.6%39.6%39.6%20%18%

Obama vs. Romney on Capital Gains Taxes: What’s your take?

  • Who do you think has the better policy on capital gains and qualified dividend taxes?
  • For those who favor the Bush tax cut expiration and would pay more in taxes, why do you hope the cut expires?

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11 Comments »
  • Fatchance says:

    G.E. I am taxed on my income. After I am taxed, I buy stock. The company I own stock in makes a profit and pays tax on that. After that money is taxed, they give me dividends and then tax it again?!? WTF?!? I feel overtaxed (triple taxed). At some point it would be great to see the US govenrment actually incentivise saving and investing by eliminating dividends and interest tax. Imagine paying 30% instead of 25% income tax and then getting to keep all of your hard earned money after you already earned it once?

    My CDs pay 0.75% interest and the government wants a chunk of that too?

    Are the rich paying most of these taxes? Yes, and I am sure that is why the 47% would love to see these go higher. Why would you care if dividends and interest taxes go up if you have no savings or investments?

    If Romney was paid $3.6M in dividends and those companies paid these with money left after the company paid it’s corporate tax, how much tax did the US government actually get? $7-10M? And that is just Romney’s share. How dare he get away with such a paultry tax rate :). He still paid 10x as much as Obama.

    Eliminate tax deductions for EVERYTHING (stop picking winners). Make it so everyone pays some tax even if it is 5% (promote interest in tax/spend). Then don’t double taxe by going after gains you make in life (incentivize private investment/retirement).

    • G.E. Miller says:

      Well… income is income is income. You aren’t taxed on what you’ve already earned again – you are taxed on new income. Giving capital gains/dividend investors a special break is picking winners. Why should the guy who starts a business or gets in to real estate have to pay taxes on the money he has invested at his tax bracket rate, while those who sit at home and live off investment income pay just 15%? Doesn’t seem fair to the guy who is actually working hard for a business investment income.

    • David says:

      G.E. is right that it’s a tax on income. You are not paying taxes on previous earnings just new ones. It’s fair to say that it’s double taxed in the sense that the corporation has already paid taxes on the income, but it’s not a triple tax like you feel like it is. Double taxes are not necessarily bad. We need a tax code that encourages investment but curtails spending beyond your means.

      I personally think a national sales tax makes the most sense while decreasing or eliminating the income tax. This would actually increase frugality. The main problem is that it will depress the economy for a short period of time due to that fact that people far outspend their ability currently, which artificially inflates the economy. Putting policies in place to cause people to be frugal will cause our economy to make a short-term adjustment.

      The problem is that we need long term solutions, but politicians are held accountable for short-term results.

      • Fatchance says:

        GE set me straight on the income is an income thing. I agree with your consumtion tax (always have though those that consume more should pay more).

        Here is my frustration. I work and work and work. At some point I would like to have the money I saved and count on it being there to support me without the government raising taxes on my nest egg.

        I would love to pay a higher rate now and nothing later. Again with the higher income tax and no tax on interest and investments.

        Along those same lines, I would love to have my state (Teaxs) have a plan where I could pay say 10 years of property tax and then be exempt for the rest of the time I own my home…but that is another story.

        G.E Love your site man. Gets my mind away from work and onto my future every time you have something to say.

        • David says:

          Fatchance, we are all feeling it. The problem is that there is no easy way to fix the economy. A recession is difficult for everyone.

          You can put your money into a Roth retirement account and then you don’t have to pay taxes on the earnings in the future.

          Good luck on your personal finance goals.

      • dan says:

        Consumer spending is actually 65% (2/3) of our economy. A national sales tax would be a disaster to consumer products.

  • Nick says:

    I’m indifferent as to whether they let the Bush tax cuts expire. I hope they do let them expire, so we can be closer to a balanced budget. But I doubt that’ll happen – they’ll just up govt spending with the new income. Even if they extend the tax cuts, how are we going to pay for it? Continue borrowing money from China? Unlikely. Mrs. Clinton has had to convince the Chinese several times during her term that they should continue to buy US debt. They’ve been deleveraging for a while now. No, it’ll be good ol’ Ben Bernanke that will buy up the debt. The federal reserve has bought 63% of the debt over the past year. This massive monetizing of the debt is not sustainable, and will lead to inflation like this country has never seen. So whether you have “more” money at the end of the day or not doesn’t really matter, if the only way they can pay for it is by monetizing the debt, thus, devaluing your money.

    Either way, it’s lose-lose.

  • Nick says:

    I’m in favor of a completely flat tax code. (Probably in the ballpark of 18-20% to balance the budget. Though I agree with Ben Franklin when he said a government that taxes you one tenth of your wages is one that taxes with a heavy hand.) For political reasons I know that would never happen, so even a mostly flat tax code – just allowing the most popular deductions (charity, kids, mortgage) would be acceptable in my eyes. Even with this, I know I would be paying more out of my pocket. It would be worth it though, knowing everyone has equal skin in the game.

  • Chris says:

    In order for our economy to work, we need people to flat out spend money. We need to put more money in everyone’s hands – people earning less than $200K hands INCLUDING those making more than $200K (BTW I don’t agree with adding this limit on there since its all relative with cost of living – 200K in NYC is barely getting by). Normally when people earning less than $200k receive some extra cash, they spend it. When people earning more than $200K receive extra cash, they invest it. Put the money back in the people’s hands so we can spend and invest it so this economy gets back on track.

    As someone who has worked in the federal government my entire professional life, believe me when I say you don’t want the government in charge of anything more than required (defense etc…) Let the people get the economy back on track.

  • Molly says:

    Question?
    I’m retired and get only $14,000 in qualified stock dividends.
    Therefore I pay 0% Federal. If Obama is elected and he extends Bush tax for those making less than $200k would that include me?
    Seems like a dumb question..but I’m confused thinking that
    qualified dividends will be taxed as ordinary income.
    Hope this makes sense? Thanks for any info.

  • Mark says:

    The the Bush tax cuts expire. Eliminate all current deductions and exemptions. Create one $50,000 exemption. Or replace all tax rates with a single 24% rate on all income more then $50,000 and no deductions. Rates are examples.

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