- President #Obama has called for an increase in the dividend tax from 15% to 45%, a promise that could cost him the election
- A bad stock market is bad for an incumbent, and President #Obama’s promise is likely to give us a bad stock market.
- “There is every reason to believe that dividend payments will continue in large numbers through November.” –Kevin Hassett
This article appears in the August 13, 2012 issue of National Review.
Pointing to Warren Buffett's "unfairly" low taxes, President Obama has called for an increase in the dividend tax that would, after one sifts through the fine print, raise it from its current level of 15 percent to about 45 percent. This promise could cost him the election. It could do so for two reasons. First, the value of equities should be approximately the same as the present val ue of their expected future after-tax dividends. A huge tax increase makes dividends far less valuable. A bad stock market is bad for an incumbent, and Obama's promise is likely to give us a bad stock market when market participants focus on his policy promises.
Second, and more politically ominous for Obama, firms that expect higher dividend taxes in the future should pay massive dividends this year in order to get the returns to shareholders before the hike takes place. These dividend payments become a near-term substitute for capital investment. Firms that ordinarily would be using their cash to purchase machines, expand operations, and otherwise generate economic growth will mail dividend checks instead.
There are clear signs that this effect is beginning to take hold. The nearby chart shows the recent history of dividend payouts and compares it with the changes in other types of income since the end of the Great Recession. While personal income has increased less than 5 percent since June 2009, and wages have increased an even lower 3 percent, dividend payouts have skyrocketed by 35 percent. Even the more robust improvement in proprietor's income, or income in owner-operated businesses, does not come close to the growth in dividend payouts over the same period.
There are also signs that these many dividend payments have coincided with a sharp deceleration in capital spending. Through the middle of last year, capital spending contributed about 1 percent on average to overall GDP growth each quarter. This has dropped steadily in recent quarters, and capital spending contributed only 0.32 percent to economic growth in the first quarter of 2012. If capital spending had been normal, GDP growth would have been high enough to let the media ballyhoo the solid Obama recovery.
There is every reason to believe that dividend payments will continue in large numbers through November, and that capital spending will take a pause. This will keep the weak economy in the headlines between now and the election. It will be bad news for Obama-but good news for Warren Buffett's taxes.
Kevin Hassett is director of economic policy at AEI