NEW YORK (TheStreet) -- President Obama is returning to the presidency and coming with him are the arguments for tax fairness and income redistribution that will characterize the debate in a revenue-starved federal government.
He will need to convince the Republican-dominated House of Representatives of whatever plan he arrives at because they, and not the president, make the laws.
That said, one of the first tax issues to be discussed will be the Bush-era tax cuts that included the favorable treatment of dividends. In recent years, near-zero interest rates have caused income hungry investors to flock to dividend-paying stocks for income and the potential for growth. As the favorable tax regime for that income flow gets debated, investors must now question whether a higher tax on dividends will siphon cash flow from investors' coffers to the federal government's.
Furthermore, will dividend-paying stocks decline in value as investors shift away from companies that pay cash directly to investors to those where cash flow is compounded internally and not paid out?We see a strong likelihood of a change in dividend taxation although we can only speculate on the form it could take. There could be income thresholds, or limits on preferential treatment. For example, we might see an income limit of $250,000 before the higher rate takes effect or a limit of $10,000 in dividends paid per person. Perhaps dividends become taxed entirely as income. We can hope for clarity but there is less likelihood of taming the grotesque creature known as the tax code and a greater possibility of something that might be called The Accountant's Full Employment Act. The first reaction of individual investors may be to equate higher taxes with sagging prices of dividend-paying stocks. We think this is a mistake. The stock market is composed of many different kinds of investors, many of whom are tax neutral, such as pension funds, where taxes are taken into account only after benefit payments are made. Likewise, income building in your IRA is not taxed until it is taken out, a period that could be some 40 years. So while taxes might make us angry, they are not, ceteris paribus, driving the market.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV