Here comes the triple whammy

Imagine if your taxes tripled — literally overnight.

The so-called Bush tax cuts are set to expire at the end of the year, Investor's Daily reports.

That means that all of the current income tax rates will rise to pre-2001 levels overnight. The lowest rate will jump from 10% to 15% and the highest from 35% to 39.6%. Although Congress extended all of the cuts at the end of last year, some Democrats have pledged to let the tax cuts expire for the "rich" — individuals making $200,000, and $250,000 for families.

Pre-2001, dividends had been taxed at workers' income tax rate. The Bush tax cuts dropped the rate on dividends and capital gains to 15%. Thus, if the Bush tax cuts expire, the dividend tax for high-income workers will jump to 39.6%. 

But there's more. The health care law imposes a new 3.8% tax on passive income, including dividends and interest. So the effective dividend tax rate for those at the upper end of the income scale would nearly triple, to 43.4%. Happy New Year!

And don't forget that dividends have already been taxed as corporate profits — so they're taxed twice.

Although proponents claim that these tax increases will only affect the wealthy, this looming tax grab will also have a significant impact on middle-class Americans who don't have to pay it directly. And the impact could weaken America's fragile financial markets further and unintentionally erode the value of the savings of millions of Americans.

Companies looking to expand their operations and create jobs, of course, are likely to think twice before doing so in high-tax locales.

Heightened dividend taxes won't just hamstring overall economic growth. They'll also hit individual investors where it hurts — in their pocketbooks. Dividend income for some investors could drop by 33%. And it won't affect only the high-income workers.

For starters, higher dividend taxes will make stocks that pay dividends less attractive to investors. So those who currently hold dividend-paying stocks — everyone from middle-class folks with 401(k)s to union pension funds to non-profit foundations — would see the value of their investments decline substantially.

Further, higher dividend taxes will likely cause companies to cut dividends in favor of deploying their cash in other ways, like re-purchasing their own stock. So individuals counting on their share of a company's profits for their income — which they'd normally receive via cash dividend — could find themselves out of luck.

That would be particularly bad news for retirees, many of whom depend on dividends as a staple of their fixed incomes. 

According to the IRS, more than half of dividend payments go to Americans over age 65 — and almost 75% go to those over age 55. 

"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," notes former New Hampshire Sen. Judd Gregg. 

"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."

Trust those thugs in Washington to do the right thing? Ha.