RDQ: Cap Gains and Dividends taxes will take wind out of recovery

Thoughts from John Ryding - Chief Economist at RDQ Economics - on the current incentive reducing taxation which Obama will be signing:
  • Although the equity market continues to close in on our target of 1,250 for the S&P 500, the rally faces a looming threat of sharply higher taxes on equity returns.
  • We argued in 2003 that the reduction in the double taxation of dividends would sharply boost equity prices and increase household wealth. Our predictions were on the right side of history as the equity market and dividend payments soared over the next year.
  • Unless Congress takes action, the top tax rate on dividends will rise to 39.6% in 2011 from 15% this year—what happened to President Obama’s promise to limit the increase to 20%? The all-in tax rate on dividends would increase to 60.7% from 44.75% when the corporate income tax rate is factored into the tax rate on paying out profits.
  • It would be bad economics to allow the tax treatment of dividends to default back to its pre-2001 treatment. It would encourage corporations to lever up their balance sheets, increasing the vulnerability of the economy to macroeconomic shocks.
  • We can only hope that the political climate leading up to the November mid-term elections forces Congress to rethink its position on dividend taxes.

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