Back in 2003, the top tax rate on dividends was lowered from 39.6% to 15% and the tax rate on capital gains was reduced from 20% to 15%.  These reductions helped to boost the economy following the 2000-2001 recession and helped support the equity markets after the bursting of the internet bubble in 2000. 

These reductions are set to expire at the end of 2010.  If no action is taken by Congress,  in 2011, the tax rate on dividends and capital gains will increase to prior levels.  Adding to the prior rates is the new 3.8% Medicare tax on investment income (passed as part of the healthcare reform acts), which will result in a top tax rate on dividends of 43.4% and a top tax rate on capital gains of 23.8%.  Note that these figures are federal rates only, CA income taxes are also paid on dividends and capital gains. 

These increases are significant and may have far reaching effects in that it can discourage productive capital formation and ultimately reduce wages and living standards of U.S. citizens.  A website that I believe has some good information about income taxes and the economic effects various tax laws have is www.taxfoundation.org.

Jeanette Anderson, CPA, CFE
Anderson Accountancy Corporation
(831) 688-1977