Toiling Away in Obscurity...and for Good Reason
The WSJ has a report (link in title, sub req) this morning on an absolutely absurd study put out by some Federal Reserve Board economists that claims the 2003 tax cut on dividends and capital gains did not boost the stock market. (Let me just say to begin with that I am in this business and EVERYONE believes that the tax cut boosted the stock market, even the Bush-haters who will only admit it in the strictest professional confidence.)
Delve into the article and you can see why these four economists are toiling away in obscurity. The study only tracks the stock market's performance "during a few days in early January after the Bush adminiistration officially announced the tax cut proposal, and two weeks in the later half of May when the bill was being discussed by the Senate and was eventually signed into law by the President May 28." (emphasis mine)
Um, two words. Cherry. Picking. On the face of it, this sort of methodology is about the least rigorous approach they could have taken and is obviously flawed to begin with. They make a lame attempt to justify this saying that "while the event windows are small they are sufficient to capture the stock market reaction." Really? Says who?
The stock market works by absorbing and reflecting all currently available information, this is to say, it factors every little damn thing going on in the world. So context is important. So what was happening in January when the tax cut was announced is important. Let's review. The President announced a $700 billion plan including the FULL REPEAL of the dividend tax. At that time, the Republicans only had a 51-48 majority in the Senate, where the fate of the tax plan would be decided. The plan came under instant withering attack by the Dems whose line was that while we are fighting an expensive war in Iraq, the President wants to give tax cuts to "Wall Street fat cats." Also, there was instant oppostition to the plan by liberal Republican Senators such as Voinovich, Chafee, and Snowe. Thus it was obvious that the plan was a long shot, and the stock market yawned as anybody with an inkling of experience in the stock market would have predicted.
Fast forward to May. The tax cut package had gone through several iterations and contortions on its way through the Great Sausage Factory and wound up being slightly bigger than half of Bush's original proposal with numerous phase-outs and compromises, namely that the dividend rate would be cut to 15% rather than eliminated. Even so it was not clear the plan would pass the Senate. While the bill was slinking towards a vote, the world was treated to a rash of suicide bombings in Israel and Morocco over the weekend of May 17th and 18th, and Monday May 19th saw a big drop in stocks as pessimism about consumer spending and increased regulatory burdens on pharmaceutical companies hit the market hard. The market never recovered those losses until...the final tax cut package passed in the wee hours of May 23rd with VP Cheney casting the deciding vote. Yes, it was that close, so you would expect that the stock market would not anticipate passage, but react on the news. And it did, the stock market never looked back after May 23, 2003.
As if that lack of context doesn't make these economists look like big enough fools, they claim that the dividend tax cut "didn't lead to a significant increase in the amount of money that companies paid out as a proportion of their earnings." This is too cute by half. Maybe as a proportion of earnings there was no effect, but earnings have grown at a torrid pace, outpacing the merely robust increase in dividend payouts that resulted from the tax cut. No one can sensibly look at examples like Microsoft's $30 billion special dividend (and the fact that MSFT said the tax cut was the impetus for the dividend) and the mountain of other examples of increased dividends and not conclude that the dividend tax cut increased corporate dividend payouts to investors.
The only thing that can be said of this Fed study is that, as my grandma used to say, "it's good enough for government work."
Delve into the article and you can see why these four economists are toiling away in obscurity. The study only tracks the stock market's performance "during a few days in early January after the Bush adminiistration officially announced the tax cut proposal, and two weeks in the later half of May when the bill was being discussed by the Senate and was eventually signed into law by the President May 28." (emphasis mine)
Um, two words. Cherry. Picking. On the face of it, this sort of methodology is about the least rigorous approach they could have taken and is obviously flawed to begin with. They make a lame attempt to justify this saying that "while the event windows are small they are sufficient to capture the stock market reaction." Really? Says who?
The stock market works by absorbing and reflecting all currently available information, this is to say, it factors every little damn thing going on in the world. So context is important. So what was happening in January when the tax cut was announced is important. Let's review. The President announced a $700 billion plan including the FULL REPEAL of the dividend tax. At that time, the Republicans only had a 51-48 majority in the Senate, where the fate of the tax plan would be decided. The plan came under instant withering attack by the Dems whose line was that while we are fighting an expensive war in Iraq, the President wants to give tax cuts to "Wall Street fat cats." Also, there was instant oppostition to the plan by liberal Republican Senators such as Voinovich, Chafee, and Snowe. Thus it was obvious that the plan was a long shot, and the stock market yawned as anybody with an inkling of experience in the stock market would have predicted.
Fast forward to May. The tax cut package had gone through several iterations and contortions on its way through the Great Sausage Factory and wound up being slightly bigger than half of Bush's original proposal with numerous phase-outs and compromises, namely that the dividend rate would be cut to 15% rather than eliminated. Even so it was not clear the plan would pass the Senate. While the bill was slinking towards a vote, the world was treated to a rash of suicide bombings in Israel and Morocco over the weekend of May 17th and 18th, and Monday May 19th saw a big drop in stocks as pessimism about consumer spending and increased regulatory burdens on pharmaceutical companies hit the market hard. The market never recovered those losses until...the final tax cut package passed in the wee hours of May 23rd with VP Cheney casting the deciding vote. Yes, it was that close, so you would expect that the stock market would not anticipate passage, but react on the news. And it did, the stock market never looked back after May 23, 2003.
As if that lack of context doesn't make these economists look like big enough fools, they claim that the dividend tax cut "didn't lead to a significant increase in the amount of money that companies paid out as a proportion of their earnings." This is too cute by half. Maybe as a proportion of earnings there was no effect, but earnings have grown at a torrid pace, outpacing the merely robust increase in dividend payouts that resulted from the tax cut. No one can sensibly look at examples like Microsoft's $30 billion special dividend (and the fact that MSFT said the tax cut was the impetus for the dividend) and the mountain of other examples of increased dividends and not conclude that the dividend tax cut increased corporate dividend payouts to investors.
The only thing that can be said of this Fed study is that, as my grandma used to say, "it's good enough for government work."
posted by Donny Baseball at 9:49 AM
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