NBR Transcripts-April 26, 2010
GLENN HUBBARD, GRADUATE SCHL. OF BUSINESS, COLUMBIA UNIV.: In the 2008 presidential campaign, Barack Obama promised that the low tax on dividends -- 15 percent -- that we have enjoyed since 2003 will rise to only 20 percent with his plan. But the president recently signed into law budget rules that will make it difficult to avoid a dividend tax increase all the way back to pre-2001 levels. Far from Washington trivia, this difference is a big deal. Such a dividend tax change is bad news for the stock market. Equities have value in part because they pay dividends. Today, a taxable investor in the U.S. should be willing to pay $0.85 for every expected dividend dollar. If taxes revert to pre-2001 levels -- and assuming other changes the president proposes -- that drops to $0.55. While stocks wouldn't drop by quite that much because markets may have already factored in changes, such a tax hike would have real effects. Economists focus on two. That dividend taxes reduce firm value is, by now, well established. And higher dividend taxes will reduce dividends and increase investors required return. That means a higher cost of capital for investment, just when we really need that investment. And increasing the tax bias against equity as the administration proposes, will encourage leverage. On the heels of the financial crisis, this is perverse. President Obama's original proposed dividend tax increase was modest. Will he keep that promise? I'm Glenn Hubbard.
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