A 43.4% Dividend Tax Is Insanity

NEW YORK (TheStreet) -- President Obama's tax plans, found within the administration's fiscal 2013 budget plan, propose that dividends be taxed as high as 43.4% (for couples earning upwards of $250,000 or individuals earning upwards of $200,000). Meanwhile, the tax rate on long-term capital gains would top out at 23.8%.

This is madness that will further consolidate the wealth of America into fewer and fewer hands.

President Obama's proposed dividend tax will punish investors and reward speculation.

Socialists (those who believe that the public should collectively own the means of production) should cheer the sanctity of dividends. They provide a cash reward to even the most passive index-fund investor.

If dividend payouts rise to a respectable level, then Americans would be incentivized to hold their investments and share in the reward of our country's collective output. It should come as no surprise that American income inequality has skyrocketed (capital gains notwithstanding) as the dividend yield of the S&P 500 has fallen to historic lows.

Capitalists (those who seek a financial reward for putting their capital at risk) are also empowered by the payment of dividends.

Alas -- under today's backward system of executive compensation -- it is the risk-takers who all too often watch their profits plundered by well-heeled executives, happy to recite the fallacy that "share-buybacks return profits to shareholders."

This is garbage.

Share buybacks allow a handful of executives to use shareholders' money to move shares from the open market to treasury stock held by the company. But this stock is not always retired; instead, it can be used to fund compensation in the form of restricted stock units (RSUs).

Of course, by reducing the amount of shares in the open market, meaningless metrics such as earnings per share are inflated, often triggering executive bonuses that are paid in restricted stock.

In essence, owners are damned to watch corporate technocrats transfer money from a company's balance sheet to the technocrats' own brokerage account. If the technocrat can use accounting gimmickry and poor decisions to juice short-term profits, good! -- they can sell their windfall of stock back to the open market and only pay a tax rate in line with the poorest Americans.

Meanwhile, if the company pays any dividend at all, the two-job working couple making $250,000 (who may be paying off hundreds of thousands of dollars in student loan debt and, perhaps, a mortgage) will be taxed at one of the highest rates in the country, should they be foolish enough to invest their money for the long term.

To be fair, the wealthiest Americans stand to benefit the most from low taxes on dividends or capital gains. But if this author had to choose, he would have higher tax rates imposed on capital gains. Then, perhaps, useless "advances" in executive compensation would seem less attractive -- and, just maybe, we could focus on sustainable growth and corporate stewardship instead of short-term profits.

-- Written by John DeFeo in New York CityFollow @johndefeo

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