Academic

The WSJ has an article today noting that the Senate Budget Committee's proposed 2011 budget resets the Bush era 15% corporate dividend tax to, wait for it, up to 39.6%.  Not the promised 20% rate that Obama had proposed -- 39.6%.  So, the ordinary income rate, which could be as high as 39.6%.  The 15% rate for dividends and capital gains is retained for couples making less than $250,000 and singles making less than $200,000.  The additional taxation rate will applied in addition to what the health care bill calls for -- a 3.8% "surcharge on investment income."  Here is the 2011 Budget Resolution, and here is the Chairman's Mark for the 2011 Budget Resolution, with some specifics.  I'm assuming that because the Chairman's Mark retains the 15% taxation for the under $250k/200k category, the WSJ is gathering by implication that the rate will return to ordinary income levels, which may be as high as 39.6% for the highest earners.  (I'm hoping that our corporate tax readers will chime in and correct/refine/slap down as necessary.)

So, the WSJ points out that this could make corporations more likely to borrow and pay tax-deductible interest rather than sell equity and pay heavily-taxed dividends.  But there's a lot of other ways that a high dividend rate could skew corporate decision-making.  And, it might have a higher impact on closely-held corporations that need to pay dividends to provide a return on capital.  So much for the small business love.

And, it seems that capital gains will also increase, but only to 20%, bringing us back to where we used to be in the 1990s, when dividends and capital gains were taxed differently.  So, let the gaming begin.  Again.

And watch for huge dividend announcements at the end of the year.  And huge sell-offs of appreciated stocks.