- posted 7 years ago
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).
-- David S. Meyers, CFP(R) http://www.MeyersMoney.com
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