Let The Games Begin--No, Not Those Games, The Tax Games

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Among all the important news in the last few days like Dick Cheney coming up with a unique solution to the Social Security crisis, one item slipped by mostly unnoticed.  Congress has started a fight over the capital gains and dividend tax rates.  Yawn.  First, the facts.  In the tax reform of a few years ago, the tax rate on capital gains was reduced from 20% to 15% and the rate on dividends was reduced from the rate on ordinary income (as high as 39% something) to 15%.  But because the Republicans did not have the votes to make the cuts permanent, they got the cuts extended only to 2008 when they turn into a pumpkin at midnight and the old rates go back in effect.  You are now muttering, "Where is this going?  I ain't got no capital gains and dividends so I care less."  But you should care and here's why.

One--You will have capital gains and dividends as you invest in Roth's, 401(k), and just plain old investments like mutual funds and stocks.  And the lower the rate, the more you keep.

Two-Your parents and grandparents rely partially on dividends and capital gains for income.  Income to eat and pay for utilities.  If more of that income goes to Uncle Sam, your parents and grandparents will need more money and all eyes will fall on you.

Three-The financial markets don't like this kind of stuff.  Talk of tax increases scares the heck out of Wall Street.  And not all these guys are stupid.  Somebody is sitting there with a calendar and copy of the tax code reading that on January 1, 2008 or 2009 or sometime, the rates go up.  And what will they do?  They will 1) sell their stocks to lock in their capital gain and 2) really sell all the stocks that pay big dividends.  And that means that your Roth, 401(k) and other investments will go down.  How far down?  Don't know but down ain't good, especially in the short run, so bad for you. 

And all future dividends and capital gains will be taxed at higher rates which means people will have less money to spend, less money to invest, etc.  And less money to spend means lower corporate profits which means lower stock price which means corporate spending cuts which means you lose your job and move back in with Mom and Dad who have no money because they are taxed at a higher rate on their dividends and capital gains which are now capital losses.  The end of the Western world as we know it.

Ok, maybe not.  But watch this one because it will be interesting with the Republicans about to reach into their bag and pull out their "the Democrats are raising taxes" puppet and Democrats screeching class warfare and tax cuts for the wealthy.  Of course, these are tax cuts for the wealthy because the wealthy spend money that creates jobs or invests their money that creates jobs and capital.  What the Dems forget is that if the wealthy (and to the government that is anybody making over $50,000) don't have the money, the government does and the government is about the worst distributor of capital on the planet.

Now we got everybody riled up with raising taxes and shafting the poor and tax breaks for Bill Gates so...what is a fair analysis and what is a fair tax rate?  I was taught in corporate life that when you don't know what to do, find out what the other guy is doing.  So tomorrow we will look at how some other countries handle taxes.  Not very exciting but important to your future success.

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