To Avoid A Fiscal Cliff Dive, Extend Today's Dividend Tax Rates

By Thomas A. Fanning
With the 2012 election behind us, now is the time for our nation’s leaders to work together to restore America’s financial integrity. There has been much discussion about the looming “fiscal cliff,” which threatens to raise taxes on millions of families at every income level and prolong the economic downturn.  If Congress and the Administration fail to act by the end of the year, the result would be devastating to families, businesses and our economy.  To rebuild our nation’s financial strength, we need tax policies that will fuel America’s economic growth by encouraging long-term investments by individuals and companies.

A Guide To Understanding The Fiscal Cliff

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1. What Is The Fiscal Cliff?

Barring any Congressional action, a series of tax increases and spending cuts will begin Jan. 1. Observers have named that series of monetary policy actions as the fiscal cliff because it would send a shock through the U.S. economy. A number of tax cuts would expire, including several that lower income and payroll taxes and limit the alternative minimum tax. Some 90% of Americans would see their taxes rise. Just as significantly, large amounts would be slashed from the government budget. This would, for example, reduce spending on defense and lower some government benefits.

Sources: Congressional Budget Office; Tax Policy Center: Toppling Off The Fiscal Cliff: Whose Taxes Rise And How?

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This is especially true for individuals who rely on investment income from dividends and capital gains. With no action, investment tax rates will soar beginning January 1, 2013, with the top tax rate on capital gains jumping to 23.8 percent from 15 percent and the top tax rate on dividends nearly tripling to 43.4 percent from 15 percent.
Bear in mind that these aren’t just the wealthiest taxpayers. Dividend income benefits all dividend recipients – millions of Americans who make tough economic decisions every day, including many seniors and those investing for the future of their families.  The most recent IRS data shows that more than 63 percent of taxpayers with qualified dividend income are 50 and older.  Older Americans are increasingly turning to dividend investments to produce supplemental income.  For those on fixed incomes and counting on dividends to help pay their bills, having to pay higher taxes could be devastating.


Raising taxes on dividends would harm virtually every American who owns dividend-paying stocks, as well as anyone who owns stocks indirectly through mutual funds, 401(k) plans, pension plans or life insurance policies. The notion that lower dividend tax rates benefit only wealthy taxpayers simply isn’t true.
America needs tax policies that support growth and promote capital formation. Preserving tax incentives for investment income will help nurture a business environment that encourages capital expenditures that – in turn – create real job growth.  Increasing the dividend tax rate would discourage investment in dividend-paying companies – threatening a wide range of sectors, including utilities, telecom, technology firms and retail businesses. This impact would be amplified if lawmakers fail to maintain the current parity between the tax treatment of capital gains and dividend income.  Eliminating this equal treatment would create a tax incentive for investors to choose one over the other, and could push them into riskier investments.
Increasing tax rates on investments – at any income level – would hurt economic growth and job creation at a time when we can least afford it.  It would increase the cost of capital to companies and could potentially change the way we return capital to shareholders. This is particularly true in the utility sector, where energy companies can help fuel the economic recovery and job creation through capital spending. In 2012, the utility industry invested $94 billion in cleaner electricity generation and a smarter, more resilient grid. Southern Company alone has committed more than $20 billion toward America’s energy future.
To help secure the financial future for all Americans, we must adopt tax policies that support growth and promote capital formation. We must keep tax rates the same between dividends and capital gains. By doing so, there is no tax incentive for investors to choose one or the other, and investors are not pushed into riskier investments. We must also keep those rates as low as possible to create an environment that encourages capital expenditures that create real job growth.
As our nation continues down the road to recovery, Congress and the Administration must encourage long-term investment in America’s economy by extending the current tax treatment on dividends and capital gains.
Thomas A. Fanning is Chairman, President and Chief Executive Officer of Southern Company