Campaign season is in full swing, and by tapping Wisconsin Congressman Paul Ryan as his running mate, Republican candidate Mitt Romney has made clear that his campaign will try to hit President Obama where he appears weakest: on the economy and the need for drastic fiscal reform.
For voters, the tepid recovery and high unemployment rate will be points of focus in the two months and change before Election Day Nov. 6, but for investors of every stripe – from those managing retirement portfolios to amateur stockpickers – there are plenty of differences between the candidates that are worth diving into.
That was what struck Tim Steffen, director of financial planning in Robert W. Baird’s wealth management business, and it’s why he put together a handy guide explaining where each candidate stands on issues ranging from income taxes and health care to just how big a cut Uncle Sam will take out of dividends and capital gains.
The latter points are critical for investors, and Steffen explains that the dividend debate will be particularly interesting to watch. Many investors play the income game by purchasing shares of companies that deliver profits back to shareholders in the form of dividends.
President Barack Obama has proposed raising taxes on dividend income for Americans that make more than $200,000 per year ($250,000 for couples), and keeping the current rates steady (0% on qualified dividends and 15% on carried interest) for those below that threshold.
Republican challenger Mitt Romney would maintain the current rates for those making more than $200,000 annually, and completely eliminate taxes on capital gains, dividends and interest income for any taxpayer with less than that in adjusted gross income.
“Dividends are a big [issue], both on the tax rates and what will happen to companies’ willingness to pay,” Steffen says. If the tax rate changes, some worry fewer companies will follow the lead of those like Apple, which initiated a quarterly dividend this year, or Cisco Systems, which recently hiked its payout by 75%, opting instead to buy back shares. “It’s a concern,” Steffen adds.
He argues that Obama’s plan would increase the cost to all taxpayers on investment income, and triple dividend taxes, but notes that there are likely to be differences between what the president proposes and what ultimately gets through Congress. For instance, the proposal to treat dividends as ordinary income has met resistance in a Senate bill passed that would call to raise such rates to just 20% on higher-income taxpayers, well short of the rate on ordinary income.
While tax issues in the campaign may not be at the fore yet, Steffen believes they will crystallize if no action is taken by a lame duck Congress to extend the Bush tax cuts in some form. Americans will start to see bigger withholdings taken out of their paychecks, he says. “When that happens, people start noticing.”
Corporate taxes are another battleground for Obama and Romney. The President has said that the fat profits of oil giants like Exxon Mobil and Chevron warrant the elimination of subsidies for such companies, and would attempt to lower the overall corporate rate by eliminating many deductions. Romney would seek to drop the corporate rate and cease taxing corporations on income earned overseas, which some argue would eliminate the quandary posed by foreign profits being locked up abroad.