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New ACI Study Highlights Impact of Tax Hikes on Investment Income


December 4, 2012 - WASHINGTON, DC

Although much of the debate in Congress and the media about the upcoming 'fiscal cliff' has focused on federal spending and income taxes, the pending increases in dividend and capital gains tax rates is no less critical to the American economy. According to a new study coauthored by Steve Pociask, the president of the American Consumer Institute Center for Citizen Research, Erwin A. Blackstone, professor of economics at Temple University and senior fellow at the institute, and Joseph P. Fuhr, Jr., professor of economics at Widener University and senior fellow at the institute, the looming January 1, 2013 increase in dividend and capital gains tax rates will have negative consequences on the job market.

"With the current rates set to expire at the end of the year, dividend and capital gains tax rates will increase significantly -- with the top tax rate for dividends increasing from 15 percent to 43.4 percent (including a new investment surcharge) and capital gains from 15 percent to 23.8 percent," according to the study's authors.

Major findings of the study include:

  • The increase in tax rates will affect market capitalization.
  • When market capital decreases, so will private business investment in plant and equipment.
  • The reduction in private investment will lead to fewer jobs in the economy.

"As policymakers deal with the ongoing fiscal crisis, investors face uncertainty and that uncertainty is being reflected in stock market prices," write Pociask, Blackstone and Fuhr. "If tax rates go up, the after-tax value of stocks and mutual fund investments will decrease -- but there is also an impact on economic growth and jobs."

The study, The Effects of Dividend and Capital Gains Tax Increases on Job Creation, can be viewed at http://www.theamericanconsumer.org/wp-content/uploads/2012/12/Tax-paper-final1.pdf.

The American Consumer Institute Center for Citizen Research is a 501(c)(3) nonprofit educational and research institute. For more information, visit www.theamericanconsumer.org.

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