Saturday, May 05, 2012

How Much Will Dividend Tax Hike Lower Stock Values?

Don Luskin points to how in January next years if current law isn't changed, then there will be a big increase in the taxation of dividends in the U.S., something that will send stock prices lower. Luskin believes that stocks could fall by more than a third because the top rate will increase from 15% to 43.4% anad as 56.6% is less than two thirds of 85%.

Luskin is right when he argues that this tax increase, if it isn't repealed before it is implemented, will lower stock prices. However, the effect will be a lot smaller than Luskin thinks for two reasons.

First, because some stock owners will see their after tax return reduced less ( if their total income is less than $200,000 per year) or not at all (if they're foreigners).
And secondly because the value of stocks isn't primarily based on dividends during the coming year, or even the coming few years, but on the present value of all dividends in all eternity, or at least for as long as the company will exist. If investors hope that the dividend tax will be reduced again in the future then the forecasted loss of value will be lower.