President Obama unveiled his 2013 budget proposal Monday,
eliciting a chorus of cheers and jeers. Among other changes, the
budget would raise rates on capital gains and dividends, close
corporate loopholes, and create the Warren Buffett-inspired
minimum tax on millionaires. Republicans, unsurprisingly, oppose
much of the budget, and expressed their disapproval by calling
it, "a recipe for a debt crisis and the decline of America."
With the president calling for changes in tax rates and new
funding for certain industries, the budget, in whatever final
form passes, is sure to have an effect on investors. Let's take a
look at who benefits and who loses from the proposed budget.
Wealthy dividend investors
Individual dividend investors making more than $200,000 and
couples earning over $250,000 would be big losers under the
proposed budget. Right now, dividends are taxed at just 15%, the
long-term capital gains rate, but the budget proposal would treat
them as ordinary income. That would raise their effective tax
rate to 43.4% on dividends, which includes a 3.8% surcharge to
support the Affordable Care Act. Companies most likely to be
affected would include high-dividend payer
(Nasdaq: FTR) , which pays a whopping dividend yield of 18.4%.
Wealthy investors would see an additional 28.4% of that chunk of
quarterly income disappearing under the Obama budget, which may
lead them in search of other investment opportunities.
, another high-yielding dividend stock, is already lobbying to
maintain current dividend and capital gains rates.
As a college education has become vital for young people
searching for a lasting career, the for-profit education sector
has sprung up to meet the huge demand that traditional
institutions could not.
The Apollo Group
's University of Phoenix, for example, serves more than 300,000
students, and budget constraints on community colleges have
fueled for-profit colleges' incredible growth. However, the
for-profits' expansion has slowed in recent years and the
budget's proposal to provide $8 billion for community colleges
should put a further dent into their profit-seeking competitors.
The funding for the community colleges would help the schools
partner with local businesses to provide students with job
Republicans including John McCain have vilified Obama for not
preventing automatic defense cuts that are set to go into effect
as a result of the supercommittee's deal on the debt ceiling.
However, defense contractors have not reacted the same way.
stands to lose out on the purchase of 13 of its F-35 fighter
jets, but the company said it understands the government's need
to be fiscally responsible. Others in the industry have said the
cuts in the Pentagon budget were relatively mild.
Republicans like to cite our 35% corporate tax rate as evidence
of oppressive regulation and the need to cut taxes. In reality,
the average tax rate that corporations pay has sunk to 12.1%, a
40-year low. The budget proposal seeks to close the tax loopholes
that allow such a low effective rate, and lower the overall
corporate tax rate.
This move would favor certain businesses, especially
high-margin retailers and restaurants, which don't benefit from
those loopholes and therefore pay the full 35% rate. For example,
in their most recent quarters,
paid a 33% tax rate,
) was 38.3%, and
(Nasdaq: LULU) forked over 35.5% of its earnings. By contrast, a
number of publicly traded companies actually received money from
the government through tax incentives between 2008 and 2010.
These included several utilities as well as industry giants like
. The budget also has put subsidies for oil and gas and
agricultural companies on the chopping block.
Perhaps the biggest winner in the proposed budget is the nation's
transportation network. The budget includes a total of $476
billion over the next six years and an additional $50 billion for
the coming fiscal year. The extra money to help repair and build
infrastructure like roads and bridges figures to be a boon for
) . The company produces all manner of construction and
road-building equipment and counts the government as a major
The final version of the budget will likely be some form of
compromise between Republicans and the administration, but the
proposals could mean an altered landscape for investors. Some
other important changes in the budget include raising the capital
gains rate on the highest income bracket to 20% from 15%, and
eliminating the "carried interest" loophole that allows venture
capital and private equity managers to pay the capital gains rate
instead of having their salaries taxed as ordinary income.
Whatever the final federal budget, our experts have found two
small companies with long-term government contracts that will
help drive their future growth. Find out more about these
potential multibaggers in the Fool's special free report: "
Too Small to Fail: 2 Small Caps the Government
Won't Let Go Broke.
" Just click
to get your free copy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a