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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.