Eliminating the tax on dividends while increasing the capital gains tax rate to 20 percent could add about 1 percent a year to U.S. stock returns with no impact on the federal budget deficit, David Bianco, U.S. equity strategist at Bank of America Merrill Lynch, said in a report.
“A dividend tax cut should lower the cost of equity and also improve corporate cash deployment,” Bianco wrote in a report dated Sept. 13. “Were such changes to help stocks appreciate an extra about 1 percent annually, it would pay for itself in our view.”
Dividends are rebounding as companies seek alternative incentives for investors facing stagnant share prices. Companies in the Standard & Poor’s 500 Index paid investors $50.44 billion in dividends in the second quarter, according to S&P. Payouts fell to $47.21 billion in last year’s third quarter, a five-year low. Cisco Systems Inc., the largest maker of networking equipment, yesterday said it will begin paying a dividend this fiscal year.
U.S. lawmakers returned to Washington this week for a monthlong legislative session dominated by a debate over whether to extend the income tax cuts passed during George W. Bush’s presidency. Barack Obama’s administration has proposed extending the cuts only for households earning less than $250,000 a year, about 98 percent of taxpayers. The Republican minority in Congress wants to maintain all the breaks, saying that raising taxes on higher-income Americans would slow the economic recovery.
“’Tis the season for politicians to propose their solutions for a better economy, more jobs and their general plan for a brave new world,” Bianco wrote. His proposal “is the best ‘bang-for-the-buck’ fiscal policy for stocks.”
The Standard & Poor’s 500 Index is little changed this year after recovering about a third of its 57 percent plunge from a record in October 2007.
Dividends have been taxed at 15 percent since the Bush tax cuts of 2003, according to the Tax Foundation. Before that, they were taxed as ordinary income. Dividends weren’t taxed from 1913 to 1935 or from 1940 to 1953.
The capital-gains tax rate is 15 percent for assets held at least a year, down from 20 percent before the Bush tax cuts.