One of the most contentious issues in the debate over how the federal government can increase its revenues may be a difference of almost 8 percentage points, and it has encouraged over a hundred companies to scramble to issue special dividend payments to shareholders ahead of the New Year. It's called the capital gains tax, and it's the tax paid on the difference between the sale price of an investment asset, like a stock, and its cost.

The long-term capital gains tax rate on most investment assets is generally 15 percent now. Compensating highly-paid employees through capital gains, such as stock holdings, is a favored method among the wealthy because that's lower than the top statutory rate on ordinary income, which is 35 percent. But President Obama has proposed to increase the top capital gains tax rate to 23.8 percent. There are exemptions such as with the sale of a home.

The highest rate for dividends, period payments that some companies distribute to shareholders, could increase to 43.4 percent from 15 percent.

The compensation of Rick Schottenfeld, chairman and CEO of Schottenfeld Group Holdings, based in New York City, is a mix of long-term and short-term capital gains, depending on how "successful" his investments are, he said.

A registered Republican, Schottenfeld has been vocal about raising the capital gains tax despite the fact that doing so will lower his income.

Schottenfeld is a member of the Patriotic Millionaires, a group of over 200 Americans with incomes over $1 million a year who are petitioning lawmakers to increase taxes for the wealthy to help plug the budget deficit, which has topped $1 trillion over the last four years.

"This whole process of lowering taxes to create jobs has led to bigger deficits, and made it so we can't afford to pay for things we need," he said. "There's obviously a need for spending cuts. It's an arithmetic problem that needs to be met in the middle. We've overshot on capital gains."

While many executives or employees who are able to negotiate their salaries often have a decision to get paid in stock holdings, people with middle or lower incomes usually do not.

"They really aren't given the opportunities like that to convert your income," he said. "How many teachers have big long-term capital gains to take advantage of?"

One of the arguments in favor of keeping the capital gains tax low is that it will be a tradeoff if the general income tax rate for high-income households increases to 39.6 percent from 35 percent, as President Obama has proposed. Households above a specific threshold, $250,000 for married couples and $200,000 for others, will pay an additional 0.9 percent tax on their earnings to finance new healthcare provisions.

Many mainstream economists argue for taxing capital at a lower rate than ordinary income to create an incentive to save or re-invest, said Joseph Rosenberg, research associate with Urban-Brookings Tax Policy Center.

"A high capital income tax would sort of discourage saving and consuming out of your current income, so less capital is available in the economy and for investment," he said.

The Treasury Department reported in its budget for the 2013 fiscal year that increasing the capital gains tax rate to 20 percent would bring in about $36 billion in tax revenue over 10 years. Taxing dividends as ordinary income would bring in an even larger piece of the pie: $200 billion over 10 years.

If all scheduled tax increases take place as scheduled in 2013, they will generate $536 billion of revenue in 2013. The increase could net $5 trillion over ten years, the Tax Policy Center states.

"No single policy is enough on its own, but as part of the overall package, it's significant," said Rosenberg. "But perhaps more importantly is who's being affected to the extent that we care about not only the revenue but distribution of taxes."

The change in taxation of capital gains and dividends "overwhelmingly" affects the top of the income distribution. Specifically, if the Bush tax cuts for high-income earners from 2003 for capital gains and dividends expire, then only 1 percent of taxpayers would be affected, all in the top income quintile, according to the center.

Kelly Erb, a tax attorney, said many middle-income taxpayers often carry most of their financial assets, outside of their homes, in mutual funds or retirement accounts such as 401(k)s. Those are often tax-deferred financial vehicles from which account holders withdraw money at retirement age. At that point, they are usually taxed as ordinary income.

For individuals who have stock holdings this year, Erb said most individuals should not necessarily sell their appreciated stock holdings in anticipation of the increase in capital gains and dividends tax rates.

"I don't think you should change your behavior," she said. "I think you should look at the timing of your behavior."

Because the capital gains tax rate applies to assets that have appreciated in price, some investors may benefit from waiting until the New Year if a stock's price is decreasing but hasn't yet led to a net capital loss.

"You may have the opportunity to offset capital losses at a higher rate," she said.

On the other hand, if an investor was planning to sell an asset anyway, it helps to talk with a financial professional or broker about how it has affected your portfolio.

"By December, you know what your gains are for the year usually. That's why they say to get rid of underperformers then," she said.

Erb said the uncertainty for regarding the tax rates is unfair to taxpayers, but particularly to low and middle-income taxpayers who can't afford to pay for professional advice to strategize their financial plans.

Dozens of companies have announced special dividends to shareholders late this year, including Costco Wholesale Corp. (COST), to avoid anticipated tax increases.

"I think it's impossible to plan," Erb said for most individuals. "I think people should be angry at Congress for putting us in this predicament."

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114 Comments

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reosgoodnh

I'll let the economists of the group state the benefits and shortfalls of the different tax rate scenariors. I just want to affirm that Obama originally ran on the premise that he would unite a divided nation. I do not know of any president in our history who has pitted one segment of our society agaisnt the other more then this man.

December 23 2012 at 6:11 PM Report abuse rate up rate down Reply
mbdwyer

don't raise income tax rates , just raise the capital gains tax rate. thats where all the big money is

December 14 2012 at 5:03 PM Report abuse -1 rate up rate down Reply
1 reply to mbdwyer's comment
rini1946

sorry there is a lot of big money there but there are a lot of middle class people who have stock. I am one of them and far from rich. You have to remember that a company makes money and the goverment taxes the profit they they pay dividend and the people who get the dividend has to pay tax on them also . Quit trying to raise taxes cut spending. Why do you think compainies are moving it is because of the taxes and the restriction. I have no problem with some of the polution restrictions but it should be the same for all countries. Where are the tree huggers protesting buying imports from countries that are destroying thier part of the world

February 15 2013 at 4:12 AM Report abuse rate up rate down Reply
DogEat_WORLD

The lack of knowing what the newest Capital Gains Taxes were, cost us $400,000 plus, between 2005 and 2006, while we were waiting out, an old 2 year Capital Gains rule. My home had a For Sale By Owner sign in the front yard after occupying our home, for 18 months plus. We thought we had 4 monthst, until our Capital Gains 2 years were up, saving us 25% on any profit we might have made? My home was valued at $675,000 plus, for well over 8 months and we were 3 months shy of that false 2 year time frame. I was asking FSBO, $675,000 for my home, which was on a flyer in the front yard. I told everyone, that I was waiting for our 2 years Capital Gains time frame to expire? I also had Real Estate Brokers calling me all of the time, asking me if they could List and Sell our home for us. I told at least 40 Realtors and many FSBO buyers, about our 2 year Capital Gains Tax we were wanting to wait out??? Our home was a hot Item on the market and none of these professionals, Realtors, or Buyer's, that we told we were waiting on, what were the OLD 2 year Capital Gains Taxes, that The Bush Tax cuts and changes did away with, that old 2 year rule??? If only we, or the many Realtors and potential buyers had only known about the Capital Gains changes??? After 7 years, we sold the home for 50 cents on the dollar and lost everything, money we saved and sacrificed, for 23 years and all of our dreams for our future. We even had to pay the buyers, to purchase our home, just to be free from the loss in late 2011. We are renting again for the first time since 1994. We at least, got involved in paying for our children's college funds, a 12 year monthly investment, they are paid off in full, only because we had that simple knowledge about the program?

December 14 2012 at 1:47 PM Report abuse rate up rate down Reply
Kruelhunter

Idiots. We're surrounded by fools and idiots. Low taxes do not cause deficit spending, our public servant's determination to spend our children's money to further their own careers combined with their ability to borrow in our names is the cause of deficit spending. So long as we continue to elect and re-elect politicians on the basis of their willingness to give us stuff they have no incentive to reduce spending regardless of their protestations to the contrary..

December 14 2012 at 12:21 PM Report abuse +2 rate up rate down Reply
J Grace

So we ante up and pay the extra tax that Obama wants to impose on the top 2%. OK, that brings in about $80B or so more each year. Duh, the problem is the Obama budget is about $1Trillion short each year. So, as in most instances, Obama and the liberals tout that the new higher tax on the wealthy 2% will solve the debt problem. Yep, you bet.

December 14 2012 at 12:03 PM Report abuse +2 rate up rate down Reply
samsuitt

To be fair to congress (which they don't begin to deserve), they really have no clue what they are doing to the middle class, and they would not understand why it is unfair. They clearly have no idea what they are doing in their own legislative bodies. Why don't they? These paragons of tax policy and budgeting are completely unversed in the art they purport to practice. Fewer than 1 in 5 of these clowns has EVER taken even 1 single formal course in either business or economics. They truly know not what they do. Does that make the lunacy any easier to understand?

December 14 2012 at 4:31 AM Report abuse rate up rate down Reply
2 replies to samsuitt's comment
Stan

Now Obama knows it all! He is the one who said, " I do not CARE about the increased revenue as a result of LOWER cap gains rate! I just want it to be fair?" DUH! This Marxist will take revenue so HE can be fair!
Some do not understand the Cap. Gains tax is optional. You do not have to sell! You can sell when you have losses to offset gains!
But the Marxist in Charge is out make sure he can get as many dependent on government as possible. All he has to offer is class warfare. He has not figured out the RICH do not have enough money to pay for his mistakes!

December 14 2012 at 9:03 AM Report abuse rate up rate down Reply
Stan

In Bush's 8 years, 53% of all pay increases went to the highest 1% of earners, leaving far less for the other 99% than necessary to keep up with inflation. I.e., they lost ground.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxWow, a smaller piece! Good thing Jobs,Gates,Buffet and Dell did not think that way! Take all of their money and pay for Obamaville for a week maybe two.
But what can you expect from someone who does not know the source of the mortgage crisis. 1994 sub prime loans 4% of all loans! 2000 they had reached 20% of all loans! Under the direction of Clinton= loan or we will not let you expand or merge! A Cuomo 1997 admitted there would be losses.

December 14 2012 at 9:11 AM Report abuse -1 rate up rate down Reply
1 reply to Stan's comment
t_trevor2

The mortgage crisis was caused by the failed social engineers who touted the glory of "affordable housing" that their myriad of mal-incentives was sure to create. Then, once they achieved their stated goal, the mouth-breathing goons had to search out a scapegoat to finger as the culprit for their own hubris.

December 14 2012 at 10:40 AM Report abuse +2 rate up rate down
crimeslawyer

What you should know is that the government will be taking more of your money in order to redistribute it to losers.

December 14 2012 at 12:37 AM Report abuse +1 rate up rate down Reply
Iselin007

Just think the middle class can't bail out the the country so the money has to come from those that caused all the outsourcing and low wages. Need I say more? Just wear adult diapers because you know who is going to pay this time.

December 13 2012 at 9:50 PM Report abuse +3 rate up rate down Reply
2 replies to Iselin007's comment
z4rock

Job makers (those with money) don't have enough money for Obama's spending. Obama planned to spread the wealth and is only spreading poverty.

December 13 2012 at 11:53 PM Report abuse +2 rate up rate down Reply
2 replies to z4rock's comment
samsuitt

Seems to me the republican party has done the redistributing. The last 30 years have seen the greatest redistribution in the history of the planet, and it continues to accelerate. In Bush's 8 years, 53% of all pay increases went to the highest 1% of earners, leaving far less for the other 99% than necessary to keep up with inflation. I.e., they lost ground. This, coupled with Bush's housing/mortgage collapse and job creation failures equals spreading poverty, suffering, and the withdrawal of capital needed to energize it from the economy.

December 14 2012 at 4:38 AM Report abuse -1 rate up rate down
t_trevor2

First, the statistic you cite relates to pay INCREASES. And it doesn't include benefit increases, which have been rising far more rapidly than wages. In combination, what this means is that the pie has been getting bigger, which is not a "redistribution".

But even if your bogus statistics were accurate, Obama has been POTUS for 4 years now, If it were true that the faux problem "continues to accelerate", wouldn't that mean the Democrats are doing the redistributing even more rapidly than the Republicans who preceeded them?

December 14 2012 at 10:19 AM Report abuse -1 rate up rate down
hfb3rd

You've bought the marxist myth totally. Consumers buy what they want. You might as well blame consumers for not wanting to spend more.

December 14 2012 at 2:48 PM Report abuse +1 rate up rate down Reply
Iselin007

After the trade deals killed off the trades of the babyboomers it scattered the people into a hopeless search for steady employment in a good job. You can't just retrain or go back to school when your older because the outsourcing and decline of America makes it impossible!

December 13 2012 at 9:40 PM Report abuse +2 rate up rate down Reply
1 reply to Iselin007's comment
t_trevor2

Nobody hires a plumber or electrician or carpenter from China, fool!

December 13 2012 at 9:47 PM Report abuse rate up rate down Reply
1 reply to t_trevor2's comment
mcgowann

Iselin007 has heard the term outsourcing during the presidential campaign but doesn't know wht it is.

Iselin007 thinks we're talking about rich CEOs and doesn't have a clue what capital gains is.

December 14 2012 at 12:24 AM Report abuse rate up rate down
Iselin007

Most people have no idea what capital gains are. Most people do know their gov is controlled by the rich people an therefore the rules are weighted for the wealthy.

December 13 2012 at 9:31 PM Report abuse +1 rate up rate down Reply
1 reply to Iselin007's comment
t_trevor2

If most people don't know what capital gains are, it means government is controlled by dumb ones!

December 13 2012 at 9:37 PM Report abuse -1 rate up rate down Reply
2 replies to t_trevor2's comment
Iselin007

Hasn't been any smart ones in control for several decades that's why the economy is the way it is.

December 13 2012 at 9:53 PM Report abuse rate up rate down
t_trevor2

Then quit blaming the problems on "the rich". Just because you read it on a bumper sticker once doesn't make it so!

December 14 2012 at 9:02 AM Report abuse -1 rate up rate down