Barack Obama's Dividend Play
September 7, 2008
by William P. Meyers

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Barack Obama has played just about all his cards right so far in the Presidential Poker game. He sounded Progressive early in the game, thus winning the Democratic activist primary pot. But now it is an all-or-nothing game.

On economic issues Senator Obama wants people to think that the Bush regime hurt them one way or another. Just as Herbert Hoover was blamed for the Great Depression when it would have happened with just the same if Democrat Al Smith had taken office in 1929, George W. Bush and the Republicans are being blamed for all of the nation's economic woes.

Strangely (until you analyze the game) Barack Obama has endorsed one Bush economic policy, special low tax rates on dividends paid by stocks. John McCain endorses the Bush policy as well, but because the will be a Democratic majority in Congress, supporting Barack Obama is a better strategy for the ultra-rich whose income comes mostly from dividends.

There are some arguments for a low tax rate on dividends, but then there are arguments for low tax rates in any specific category. The basic argument is that the tax amounts to double taxation because corporations (sometimes) pay taxes on profits, and then dividends are distributed out of profits and taxed when passed out to individuals. But money is constantly taxed in our society as it moves around. The money paid to wage earners has been taxed in various ways before they receive it from employers, and it is taxed again when they spend it (sales tax, real estate tax, etc.). So the double-taxation argument is just sophistry.

The bottom line is that only rich people derive a significant proportion of their income from stock dividends. So a tax cut on dividends is a tax cut for the rich, and an increase mainly hits the rich as well.

When George W. Bush took office dividends were taxed like any other income to individuals, which meant the top rate was about 40%. The Bush Tax Cuts for the Rich reduced the rate to 15%. John McCain wants to retain the 15% rate.

Democrats in Congress say they want to reverse the Bush Tax Cuts for the Rich. So if they had their way, the maximum tax rate on dividends would end up around 40%. If McCain is elected they can put that into effect. They don't need to worry about a McCain veto. All they have to do is let the Bush tax cuts expire.

Barack Obama has proposed raising the rate to only 20%. Democrats in Congress would not want to defy a Democratic President, so they would have to pass a new law lowering the dividend tax rate to 20%. The rich will be better off under Obama than under McCain, if this scenario plays out.

Why would Barack Obama want to give the rich a break? Because actually he is from the same economic school as Ronald Reagan, the Chicago School of worshipping free-market capitalism. Barack taught law, a necessary adjunct to free market economics, at the school for years. He is not progressive on economics, but he had to sound progressive to win the Democratic primaries.