Doug Kass on Donald Luskin:
Many are concerned that a combination of higher tax rates and lower spending puts the U.S. on a fiscal cliff at year-end. (CNBC’s Maria Bartiromo has been particularly vocal about the subject.)
On the tax point, Don Luskin wrote an op-ed in The Wall Street Journal over the weekend, entitled “The 2013 Fiscal Cliff Could Crush Stocks.”
The essence of Don’s view is, “Do the math on dividend taxes. Yields lower, stock prices lower—maybe by 30%.”
My reaction to the article is that it is hyperbolic and that the analysis (that the dividend tax rate will rise from 15% to 43.4%) is wrong-footed.
Most significantly, the author assumes that 100% of all dividends received by investors are taxed.
This is plain wrong.
Most industry observers calculate that less than one quarter of dividends (between 20% to 25%) are paid out to taxable investors. The balance, or 75% to 80%, are paid to non-taxable investors such as IRAs, pension plans, charitable institutions, etc.
If we make the above adjustment to reality, Don Luskin’s vulnerability of stock prices drop to only 7% (22.5% of a 30% hit).
As well, it is highly unlikely that the tax rate on dividends will triple as the Obama administration has already signaled that this item is open to debate. (And obviously, if Mitt Romney is elected, he will oppose the increase and, at the very least, limit the tax rate rise on dividends to probably something close to the capital gains rate of 20% to 25%.)
Net-net, if the dividend tax rate is increased to the capital gains rate, the calculus is that the potential or theoretical hit to stock prices is closer to 2%, not the 30% that Don Luskin suggests.
Finally, if the dividend tax rate is hiked, corporations will react by substituting some portion of their dividend payments with broader share repurchase programs. (When the dividend tax rate was initially cut to 15%, corporations more aggressively raised dividends and cut back share repurchase activity.)