Dividends taxes won't crash the market

A chain e-mail accuses Sens. Hillary Clinton and Barack Obama of wanting sharp tax increases, while praising Sen. John McCain for holding the line. (Click here to read the chain e-mail in its entirety.)

The e-mail asserts that Clinton and Obama want to raise capital gains taxes and dividends taxes, as well as raise tax rates for all income levels. We’ll look at dividends taxes here.

Dividends are payments that companies make to stockholders as a way of distributing profits. Before the Bush administration, dividends were taxed like normal income, with the rate for the wealthiest taxpayers reaching 39.6 percent. President Bush cut the tax rates on dividends to 15 percent, the same as capital gains taxes. Obama has said he will let the dividends tax cut expire so that dividends will be taxed at the same rate as normal income. We can't find an example of Clinton directly addressing the dividends tax, but she has spoken repeatedly about letting the Bush tax cuts expire for higher income taxpayers. Her campaign didn't respond to our questions.

Here's what the e-mail states:

"DIVIDEND TAX

MCCAIN

15% (no change)

OBAMA

39.6%

CLINTON

39.6%"

"How will this affect you?" the e-mail asks. "If you have any money invested in stock market, IRA, mutual funds, college funds, life insurance, retirement accounts, or anything that pays or reinvests dividends, you will now be paying nearly 40% of the money earned on taxes if Obama or Clinton become president. The experts predict that 'Higher tax rates on dividends and capital gains would crash the stock market yet do absolutely nothing to cut the deficit.'"

The e-mail's explanation gets a few things wrong. Only taxpayers in the top bracket would pay 39.6 percent on dividends taxes. It's also unlikely that an increase in dividends taxes would crash the stockmarket.

"That's hyperbolic," said William Ahern, a spokesman for the Tax Foundation, a progrowth tax policy think tank that opposes increases in dividends taxes.

Another tax policy expert also shot down the stock-market-crash scenario:

"Raising the dividend tax could cause some high income U.S. investors to move some of their wealth out of stocks, but all the analyses I have seen suggested the effect on the stock market would be small and would be swamped by changes in stock prices due to other causes," said Eric Toder, a tax policy expert with the Urban Institute.

We find the e-mail gets its summary of the dividends tax only partially correct, though it is right that Obama specifically proposes an increase on the tax and Clinton has indicated she wants to let the Bush tax cuts expire for higher-income taxpayers. But Clinton hasn't staked out a specific change on the dividends tax and it's misleading for the e-mail to use one. And, the e-mail is wrong to suggest a change in the dividends tax would cause the stock market to crash. We rate its claims Barely True.