Donald Luskin got one key point about the coming fiscal cliff wrong, Doug Kass writes today in Barry Ritholtz’s The Big Picture blog. Luskin, who wrote an op-ed in the Journal this weekend, jumped on one key expectation of tax and spending cuts to come at the end of this year: the dividend tax rate will rise to 43.4 per cent and stocks will take a massive hit.
“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,” Kass says.
Kass points to the fact that most dividends — more than three-fourths — are paid out to non-taxable investors, and that Obama is willing to discuss the final increase on taxes.
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.)
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