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The really bizarre thing about the fiscal cliff:  it appears to be benefiting real estate investment trusts (REITs).

The special dividend tax rate will disappear if the fiscal cliff happens.  That means that taxes on qualified dividends will increase from 15% to 43.8% if the fiscal cliff happens, whereas capital gains will be taxed at 23.8%.  For this reason, many dividend paying stocks will become tax disadvantaged.

REITs, on the other hand, are taxed a bit differently.  REITs pay large dividends, but they are exempt from corporate taxes.  As a result of this, their dividends get taxed as ordinary income, rather than under the special dividend tax rate.  The top ordinary income tax rate will also increase, but only from 35% to 39.6%; a much smaller increase than the one for qualified dividends.

As a result, it would appear that some dividend investors have started shifting towards REITs and exiting other dividend-paying stocks, such as utilities.

On a semi-related tangent, if this all sounds overly complex and virtually incomprehensible — it is.  So long as our tax code is ridiculously complex, only about 2% of the population will actually understand it. This makes a great case for more tax simplicity.

As a nation, we incur $435 billion in tax compliance costs every year (equal to about 3% of our economy!).  Talk about inefficiency!  We could actually help solve some of our deficit woes merely by simplifying the tax code and freeing up some of that $435 billion for investment.

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