A dividend for Romney

Reuters

Investor Warren Buffet arrives for the premiere of the film "Wall Street: Money Never Sleeps" in New York September 20, 2010.

Article Highlights

  • President #Obama has called for an increase in the dividend tax from 15% to 45%, a promise that could cost him the election

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  • A bad stock market is bad for an incumbent, and President #Obama’s promise is likely to give us a bad stock market.

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  • “There is every reason to believe that dividend payments will continue in large numbers through November.” –Kevin Hassett

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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

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About the Author

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
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