Editor’s Note: This is one of three columns that examine how the election of Jeb Bush, Hillary Clinton or Donald Trump might affect an investor’s dividend-oriented portfolio.
Jeb Bush maintains that his economic and tax plan — one of the first released by a 2016 presidential candidate — will generate 4% economic growth and deliver greater prosperity for everyone across the income spectrum.
The impact of the former Florida governor’s plan on dividend investors would come largely from his proposal to reduce the number of tax brackets from seven to three and to cut tax rates within those brackets.
Tax Simplification and Lower Dividend Taxes
Under the plan, those earning less than $32,450 if single, $64,900 if married and filing jointly, or $42,700 if the head of a household, would pay income tax at a rate of 10% and see capital gains and dividends taxed at 15%.
Those earning more than that but less than $85,750, $141,200 or $122,100, respectively, would pay 25% on ordinary income and 15% on capital gains and dividends. Those earning above those levels would pay 28% on ordinary income and 20% on capital gains and dividends.
For the highest earners, the combination of lower ordinary income tax rates and a lower rate on capital gains and dividends would provide relief for both long-term and short-term investors. (The current federal top marginal tax rate on dividend income is 23.8% for single taxpayers with an adjusted gross income of $200,000 or more, or $250,000 or more for married taxpayers filing jointly. This is the sum of the 20% rate on dividend income plus a 3.8% tax on unearned income to fund the Affordable Care Act.)
For those in the highest income bracket under the Bush plan, for example, the tax on short-term gains and dividends would be at much lower ordinary income rates than is currently the case — 28%, as compared with rates ranging from 33% to 39.6% depending on income. The lower rate would be much less of a penalty for those taking short-term gains than is currently the case.
Other changes proposed by Bush include:
- Increasing the standard deduction from the $6,300 to $11,300 for single filers, $12,600 to $22,600 for married joint filers, and from $9,250 to $16,750 for heads of household. The personal exemption would remain at $4,000.
- Eliminating the deduction for state and local income taxes. This would favor earners in low tax states versus those in higher tax states, including California, New York and Massachusetts.
- Eliminating the Alternative Minimum Tax.
- Eliminating the Net Investment Income Tax of 3.8% passed as part of the Affordable Care Act.
- Eliminating the estate tax.
- Exempting taxpayers over the age of 67 from paying the employee portion of the payroll tax.
- Taxing carried interest at ordinary income rates.
On the business side, the Bush program would cut the corporate tax rate to 20% from the current 35%, eliminate the deductibility of interest expenses and allow all capital investments to be fully deductible in the year they are purchased.
In addition, the program would enact a territorial tax system that would give companies a 100% exemption on dividends received from foreign subsidiaries. There also would be a one-time repatriation tax of 8.75% on all foreign profits companies bring back to the U.S.
According to the Tax Foundation, a nonpartisan tax research group, Bush’s tax plan would increase the size of the economy by 10% over the long run, lead to 7.4% higher wages and a 28.8% increase in the nation’s capital stock. It attributes the growth mainly to the significant reduction in the price of capital due to the shift to full expensing and the reduction of the corporate income tax rate from 35% to 20%. Reducing marginal tax rates on individual income would increase incentives to work and result in 2.762 million full-time equivalent jobs.
On a dynamic revenue basis, the Tax Foundation estimates that the Bush tax program would greatly increase the U.S. economy’s size in the long run, leading to higher incomes for taxpayers at all income levels. In percentage terms, however, the greatest gain in adjusted gross income (16.4%) would flow to the top 1% of earners. The plan also would be a large tax cut, which would reduce federal revenue by $1.6 trillion over the 10 years from 2015 to 2024 and increase the federal government’s deficit both on a static and dynamic basis.
For dividend investors, Bush’s proposed program and a Bush presidency would be largely favorable. His tax proposals would encourage investors to seek dividends and let them keep more of what they earned. His proposals on corporate taxation — especially those dealing with expensing of capital investments, more favorable treatment of foreign earnings, and lower rates overall — would benefit the large multinational companies that are traditional dividend payers.