Ronald Reagan would be proud of Obama’s tax rates

The president's plan for dividends and capital gains is better than even the Gipper's most investor-friendly levels

By InvestorPlace Mar 1, 2010 9:58AM

By Richard Band, editor of Profitable Investing

 

There’s a lot of fuss being made about Democrats’ plan to “raise taxes” -- or more appropriately let the Bush-era tax cuts expire. And while I’m not happy about Washington taking a bigger piece of the pie, the fact of the matter is that President Obama and his party aren’t getting greedy as many investors and economists feared.

 

For instance, while the top tax on ordinary income (that is, wages and interest) will jump to 39.6% from 35%, the economy survived just fine under Bill Clinton when that rate was in force.

 

Of greater consequence for growth (both for the economy and for your retirement fund), the president decided to raise the capital gains tax at a modest level that even Ronald Reagan would be proud of. Though this burns some people up when they hear it, take a look at the numbers and judge for yourself:

 

In Ronald Reagan’s heyday, capital gains were never taxed at less than 20%, and dividends were never taxed at less than 28%. Under the Democrats’ current proposal, the president aims to raise the capital gains tax to a maximum of 20% on long-term gains (from 15% at present). And in an even more pleasant surprise, the top tax on dividends will also go to just 20% as well.

 

Here’s the scorecard again so there’s no confusion: Reagan was at 20% for capital gains and 28% for dividends. Obama is at 20% for capital gains and 20% for dividends.

 

 

As an investor, then, I have to view Obama’s tax policy at least as favorably as Reagan’s.In fact, for those of us who cherish dividends, it may be a little better.

 

Looking forward, it appears that high dividend stocks in general are likely to thrive under Obama’s friendlier-than-expected tax policy. Stocks that pay above-average dividends are about to be revalued upward as the market digests the fact that relatively low dividend tax rates are here to stay.  Particularly, I think electric and telephone utilities will succeed the most.

 

If you’re interested in dividends, check out a list of the highest yielding dividend stocks in the Dow.


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