Will a dividend tax hike lower stock values?

If current law isn't changed, then there will be a big increase in the taxation of dividends in the US next year, something that will send stock prices lower.

By , Guest blogger

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    In this May 2012 file photo, trader Peter Mancuso, right, works on the floor of the New York Stock Exchange. If tax law isn't changed, next year will see a big increase in dividends taxes, which experts say will lower US stock prices.
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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Luskin is right when he argues that this tax increase, if it isn't repealed before it is implemented, will lower stock prices.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).

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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.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on stefanmikarlsson.blogspot.com.

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