Opinion: Tax hikes will exact steep price

If current law goes into effect, consider the changes that
2013 will bring:

Payroll taxes will increase by $120 billion; bonus
depreciation will end, adding $64 billion in taxes; the Affordable Care Act,
also known as ObamaCare, will kick in, adding $46 billion in taxes; the tax
cuts will end for upper-income Americans, increasing taxes by $83 billion; the
tax cuts will end for middle-income Americans, increasing taxes by $198
billion.

{mosads}The likely consequences are obvious. Such a massive increase
in taxes will lead to a significant slowdown in the economy as investment and
disposable income both drop dramatically. People and businesses will have to
retrench in order to deal with these higher taxes.

This will result in less economic activity and potentially
less revenue for the federal government. The opportunity to partly address deficit problems through economic
growth will be lessened, and this will ensure that our deficits and debt situation
will continue to grow and become even more of a drag on our prosperity and
national culture.

Yet along with these evident effects of the tax increase
gluttony, there will also be a number of very significant occurrences that
have, so far, gone unnoticed or at least not discussed — especially by this
administration, which is so enamored of taxing more people at higher rates to
support its massive expansion in the size of the federal government.

First, under the Obama plan, the tax on dividend income will
jump to a record high. It will go from 15 percent to a new top rate of 43.4
percent. This will create numerous unintended consequences that will pervert
investment decisions and drive down economic activity.

For people who are retired and living on a fixed income, it
will mean a massive adjustment. This is especially pernicious as we head into a
time when the largest generation in American history, comprised of the
so-called baby boomers, is moving into retirement. This is the first generation
in history to retire depending primarily not on defined benefit plans but
rather on contribution plans that are disproportionately comprised of dividend
income.

Thus this generation, aging out of alternative ways to
generate income, will find itself being socked with a tax increase promoted by
the left as a prerequisite for “fairness.” It will be a bitter pill to swallow
for a lot of people whose only pathway to adjusting to their reduced income
will be through a commensurate reduction in their standard of living — and all
this to feed the left’s insatiable appetite for a large and more costly
government.

In addition, the tax on capital gains will go from 15
percent to 23.8 percent. It is also fairly certain that the new 3.8 percent tax
on passive income will take effect. Both of these changes will further retard
any possibility of economic expansion.

We must also consider the effect that these tax increases on
capital gains and especially dividends will have on stocks. Companies that pay
dividends have seen their stock price surge amid the extremely low interest
rates of the last few years, for the simple reason that people have sought a
better return through dividends.

These companies are going to see their stock prices come
under pressure. The attractiveness of investing in dividend-paying stocks will
be significantly muted when the tax rate on those dividends jumps from 15
percent to as high as 43.4 percent.

Thus the baby boom generation takes a double hit.  First, income is impacted by the higher tax
on their dividends; second, the value of their portfolio is reduced due to the
fall in the value of dividend-paying stocks.

All this will lead to a further contraction in economic
activity by a generation that has lost considerable spending and savings power
through the simple act of getting old. This cannot be good for the nation or the economy as a whole.

When the tax man cometh, he brings with him a whole array of
unintended consequences.

Judd Gregg is a former governor and three-term senator from
New Hampshire who served as chairman and ranking member of the Senate Budget
Committee and as ranking member of the Senate Appropriations subcommittee on
Foreign Operations. He also is an international adviser to Goldman Sachs.