Luskin makes a case for a 30% stock market correction

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Mainly, he argues that if Congress does nothing, then between the expiration of the 15% dividends (and cap-gains) taxes, the increasing rates on marginal income due to other expirations of Bush tax cuts, plus the new ObamaCare tax on investment income, the taxes on dividends received by the wealthiest will go from 15% to 43.4% -- and then he argues that the effective after-tax yield on a dividend-paying stock will go down a lot and therefore the stock price will have to go down enough to bring that effective after-tax yield back up.

There are several holes in his logic, the biggest of which he indicates himself - that not all investors are these tax-sensitive high-income individuals. But he does argue that there are enough of them and that they are the marginal investors who do set the prices, that this should have an impact.

It's an interesting thesis, but the case is probably a lot stronger that we'll have a significant equity market move due to larger economic factors such as the ongoing European situation. (Just the other day, Krugman was suggesting that a better solution in Europe would have been if there were no unified currency and the various countries could devalue their currencies and inflate their way out of the crisis. That's dubious, of course, but given the direction of fiscal policy in our own country, one has to wonder if that's in our own future, too -- in which case dividend taxes are likely to be much less the crisis than inflation would be - noting that inflation has the same effect - lowering "real" yields and therefore leading investors to require higher payout rates to compensate).

Well it is on the opinion page of the WSJ, a spot that is somewhat notorious for having an political point of view. It looks more like a talking point for extending the 15% rate than an investing theme.

I wonder if Mr. Luskin was watching high-dividend stocks and stocks generally when the QDI and 0%/15% gains rate was first introduced. I was, and there have been some more comprehensive studies of them since. They didn't jump in price in the way his theory suggests they would have, and it's easy to come up with a half-dozen reasons why that was the case (David you listed many of them).

Taxes can definitely affect the pricing of an investment but not in this way - there are too many investors not affected by it, and companies can respond. When that isn't the case, it's more of an issue. One area that comes to mind is energy trusts or MLPs, where tax treatment is a big motivation for holding them. Munis, possibly. Demand should drop if you strip away the tax preference. But even for these, you can see other investors stepping in well before the pricing adjusted to that implied for a high-bracket, taxable, US investor.

-Tad