Sunday, May 6, 2012

Taxamageddon to Crush Stock Market?

After year-end, under current law, the top dividend tax rate will rise to 43.4% from 15%. That's not only because the temporary low 15% rate granted under the 2001 Bush tax cuts will revert to the prior rate of 39.6%. In addition, a provision of ObamaCare slaps a 3.8% surtax on all forms of investment income, including dividends—the resulting total is 43.4%.

So on Jan. 1, an investor won't keep $8.50 of that dividend—he'll pay a 43.4% tax and keep only $5.66. Suddenly, a stock that yielded him 8.5% now yields only 5.66%.

If 8.5% was the after-tax yield that investors demanded in order to allocate their capital to that particular company, then 5.66% will not be sufficient. That company's stock price will have to fall until it once again offers an 8.5% after-tax yield.

Precisely, the stock price has to fall by the percentage difference between $8.50 and $5.66. It will therefore fall to $66.60 from $100—that's 33.4%. And it's also a good first approximation of how much the overall stock market will fall when dividend taxes rise to 43.4% from 15%.
 Unless Congress acts.  Good luck with that. Time to buy gold? or lead...

Found at TaxProf  by way of Insty's replacement, Ed Driscoll.

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