Canada Shows Us How to Kill Our Stock Market
Numerous pundits have raised the specter of Rep. Charles Rangel becoming the Chairman of the House Ways and Means Committee in a Democrat controlled Congress. Rangel has gone on record saying that there isn't a single tax cut enacted during the Bush administration that he wouldn't seek to reverse. Investors are specifically worried that the 2003 dividend and capital gains tax rate cuts would be allowed to expire under a Rangel controlled Ways and Means. They should be, and just to make it all that much more real and frightening, the Canadian government today gave us a taste of what it would be like for our stock market, where our nest-eggs, our pensions, and many people's hopes and dreams are invested. Canada is raising taxes on a tax-favored security known as an "income trust" and the value of these securities predictably tanked. This is what will happen to the value of stocks here in the US if dividend and capital gains taxes are allowed to go up in 2010. In fact, this will take place well before 2010, when the market anticipates that the tax cuts will be allowed to expire. Happy investing.
posted by Donny Baseball at 4:48 PM
5 Comments:
I recall back in 2003 the consensus estimate was that the market would appreciate about 8% as a result of the tax cuts, i.e., higher valuation as a result of higher cash flow. If that were correct, then would it be reasonable to expect a drop of 8% if those tax cuts were taken back? That doesn't sound too back, does it?
opps, too bad, not "too back".
A 10 year stream of dividends, discounted and taxed at a 35% rate is worth roughly 24% less than if taxed at the 15% rate. Companies will likely slow dividend growth as well in respond to the higher dividend tax. In a perfect world the retained cash will boost stock values as much as if the dividend was paid out, but that's in a perfect world. Usually what happens is management does something dumb with the cash, destroying value.
management can just buy back stocks instead of paying dividends.
I just don't think it would be terrible if the 2003 tax cuts were taken back, or not extended (it would be negative, but not terrible). The biggest negative impact will be on capital formation. Overall economic growth will slow as a result, but that alone is probably not enough to push us into a recession, I think. The market would correct, but will move on and march forward eventually.
Experts have talked about this before. How many times have you read about the importance of ‘adding value’ for your audience? How many times have you read about ‘building trust’ with your readers/prospects?
Many, many times. You know it well. Every marketing guru has spoken about this topic. I’m sick of hearing it. But it STILL bears repeating.
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