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Issues

Dividend Tax

On December 31, 2012, the current tax rate on dividends and capital gains – which is currently capped at 15 percent – will expire.  Unless Congress acts before the end of the year, the maximum tax rate on dividend income will almost triple, reaching 43.4 percent.  Meanwhile, the maximum tax rate on capital gains will also increase to 23.8 percent

Today’s lower tax rates on dividends are good for the economy, American businesses, retirees and other investors. Such a surge in the dividend tax rate would have a devastating effect on job creation and investment in the recovering U.S. economy.

If the current tax rates expire, creating a significant disparity between the top tax rate on dividends and capital gains, federal tax policy will distort investment decisions by favoring growth stocks and debt investments over dividend-paying investments. In essence, the tax code would punish Americans who invest in dividend-paying companies like Con Edison.

Issue Snapshot

Dividends benefit millions of American

Lower dividend tax rates don’t just benefit Con Edison shareholders. They also benefit the millions of Americans who own stock indirectly through mutual funds, pension funds, and 40l(k) plans.

For 2009, the most recent year data is available, 23 percent of tax filers who reported dividend income had adjusted gross income (AGI) under $25,000; 69 percent had AGI under $100,000.

Higher dividend taxes would make stocks less valuable. A share of stock is worth the discounted present value of the future earnings stream after taxes. Stock prices would fall over time to adjust to the new after-tax rate of return—this would hurt all shareholders.

If you currently pay the 15 percent rate on dividends, a $1 qualified dividend nets you $0.85 after taxes. If Congress does not act before January 2013, that same $1 dividend net only $0.58 under the maximum dividend tax rate.

Tripling the rate on what investors pay on dividends would increase our cost of capital and affect Con Edison’s ability to finance new projects.

Lower dividend tax rates increase the value of stocks and lower the cost of capital, allowing companies to get more favorable terms when borrowing money to make investments.

The approaching expiration of the 15 percent dividend rate would cause debt to be preferred over equity in order for companies to raise capital.

The perverse result is a tax code that incentivizes companies to take on more debt. Congress should not be encouraging weaker balance sheets and over-leverage.

Get the Facts

What is a dividend?

A dividend is a payment made by a company to its shareholders, usually on a quarterly basis. Companies are not required to issue dividends, but many do so as an incentive for shareholders to own stock in their businesses

Who benefits from today’s lower dividend tax rates?

There is a perception that lower dividend tax rates benefit wealthy taxpayers.  The reality is that tens of millions of Americans – from all income levels and age groups – directly own stocks that pay dividends.

Lower dividend tax rates don’t just benefit direct shareholders though.  They also benefit the tens of millions of Americans who own stocks indirectly through mutual funds, and they support the value of stocks held through or in life insurance policies, pensions funds, 401 (k) plans, or individual retirement accounts.

How do dividend-paying companies benefit from lower dividend tax rates?

Lower dividend tax rates make dividend paying companies more attractive to investors.  By attracting new investment in their shares, dividend-paying companies are able to attract the capital they need to fund major infrastructure and other investment projects.  These capital-investment programs offer an important source of much-needed, high-quality job creation in many states.

Why is it important that the tax rates for capital gains and dividends be equal?

If Congress doesn’t act to stop the dividend hike before the end of the year, lawmakers will create tax policy that favors growth stocks and debt investments over dividend-paying investments.  Such a trend would invariably erode the share prices of many dividend-paying companies, whose stocks are held by working families, retirees, and others who rely on those investments for steady dividend income.  Maintaining parity between the tax rates for dividends and capital gains is essential.

What can you do?

Your voice matters! Help Con Edison tell Congress to stop a dividend tax hike.

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