What Obama's Budget Means for Investors


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 Frontier Communications (NAS: 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. AT&T, another high-yielding dividend stock, is already lobbying to maintain current dividend and capital gains rates.

For-profit education
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 training skills.

Defense contractors
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. Lockheed Martin 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.

Corporate taxes
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, Starbucks paid a 33% tax rate, Chipotle's (NYS: CMG) was 38.3%, and lululemon athletica (NAS: 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 General Electric (NYS: GE) and Verizon. 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 machinery maker Caterpillar (NYS: CAT) . The company produces all manner of construction and road-building equipment and counts the government as a major customer.

Foolish takeaway
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 right here to get your free copy.

At the time thisarticle was published Fool contributorJeremy Bowmanowns shares of Chipotle but holds no other positions in the above companies. The Motley Fool owns shares of lululemon athletica, Lockheed Martin, Starbucks, and Chipotle Mexican Grill.Motley Fool newsletter serviceshave recommended buying shares of Chipotle Mexican Grill, Starbucks, and lululemon athletica, as well as writing covered calls in Starbucks. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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