Doug Kass on Donald Luskin:


Many are concerned that a combination of higher tax rates and lower spending puts the U.S. on a fiscal cliff at year-end. (CNBC’s Maria Bartiromo has been particularly vocal about the subject.)

On the tax point, Don Luskin wrote an op-ed in The Wall Street Journal over the weekend, entitled “The 2013 Fiscal Cliff Could Crush Stocks.”

The essence of Don’s view is, “Do the math on dividend taxes. Yields lower, stock prices lower—maybe by 30%.”

My reaction to the article is that it is hyperbolic and that the analysis (that the dividend tax rate will rise from 15% to 43.4%) is wrong-footed.

Most significantly, the author assumes that 100% of all dividends received by investors are taxed.

This is plain wrong.

Most industry observers calculate that less than one quarter of dividends (between 20% to 25%) are paid out to taxable investors. The balance, or 75% to 80%, are paid to non-taxable investors such as IRAs, pension plans, charitable institutions, etc.

If we make the above adjustment to reality, Don Luskin’s vulnerability of stock prices drop to only 7% (22.5% of a 30% hit).

As well, it is highly unlikely that the tax rate on dividends will triple as the Obama administration has already signaled that this item is open to debate. (And obviously, if Mitt Romney is elected, he will oppose the increase and, at the very least, limit the tax rate rise on dividends to probably something close to the capital gains rate of 20% to 25%.)

Net-net, if the dividend tax rate is increased to the capital gains rate, the calculus is that the potential or theoretical hit to stock prices is closer to 2%, not the 30% that Don Luskin suggests.

Finally, if the dividend tax rate is hiked, corporations will react by substituting some portion of their dividend payments with broader share repurchase programs. (When the dividend tax rate was initially cut to 15%, corporations more aggressively raised dividends and cut back share repurchase activity.)

Category: Dividends, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “Kass: Luskin All Wrong About Dividends & Taxes”

  1. microcap says:

    Luskin is hardly worth wasting your brain bytes on.

    But I never understand why dividends are taxed at all whereas the code gives preference to capital gains. It seems so clear to me that the gains preference has ultimately been harmful to the economy by providing incentives to managements to game the stock price to juice their compensation.

    It’s pretty clear as well that dividends should be much higher given the remarkable strength in corporate earnings. But managements hate giving up the control that surplus cash in the bank gives them, so they can make overpriced acquisitions to increase their fiefdoms at shareholder expense.

    I would prefer a zero tax rate on dividends and higher on capital gains– comments?

  2. Roanman says:

    I agree regarding a zero rate on dividends.

    I’d take it a step further and make dividends a write off at the corporate level, and scale in the double taxation we now employ on dividends against interest payments. Which would serve to incentivise corporations to trade out debt in favor of equity.

    Dougy Kass employs the unnamed experts from afar technique in this piece which always causes me to cease caring about anything that comes after.

  3. machinehead says:

    @microcap — dividends are double-taxed, first at the corporate level, than at the individual level. Taxing them once would be fair and efficient.

    Whatever the tax rate may be on capital gains, the cost basis should be inflation adjusted. Long-term capital gains include phantom gains from inflation, which did not increase the seller’s purchasing power.

    Taxing a loss of purchasing power adds insult to injury.

  4. NoKidding says:

    So his arguments are
    1) most dividends are in tax free anyway.

    So then why bother? Game theory says nearly all dividends will go that way after a tax is raised.

    2) Obama is backing off on the rate hike.

    I don’t see how that effects the post implementation effect. Muddling words before a decision creates uncertainty, but once a decision is made, the effects will be what they will be.

    3) Romney would not support it.

    So what. Either there is a tax or not. The odds that there might not be have no effect on the results after we learn that there will be. Does dropping a hammer on your toe hurt 50 percent less because there is a chance you might have missed?

    4) corporations will shift from dividends to stock buy backs.

    So then why bother?

    Kass and Luskin are agreeing the tax is stupid, and disguising the agreement as an argument.

  5. TLH says:

    Why do we make things so complicated? Two tax rates. Hopefully 15 to 25%. No itemized deductions. $50,000 personal deduction for each person. All income treated exactly the same. The rich would pay more. The politicians just want the complicated tax code to get political contributions. What is different from the Walmart bribes in Mexico and our political contributions?

  6. NMR says:

    Author and venue (Luskin/WSJ oped page) are not to be taken too seriously. These clowns have probably cost unsophisticated but conservative minded investors a bundle over the last five years.

  7. constantnormal says:

    And dividends ought to be taxed at higher rates than capital gains, because those collecting dividends are not performing much of an economic service the way that buyers and sellers are (they establish prices).

    Also, dividends ought to be taken out of the corporate earnings picture before taxes are applied, as if they were an expense to the company. Then the playing field would be a bit more level.

    I’d like to see the tax picture for capital gains become more complex, not less, with two additional brackets … assets held for less than 90 days (excluding bonds held to maturity) ought to have their capital gains taxed at a rate above the current maximum, so as to reduce meaningless market churn and destroy HFT (sorry, day-traders). And assets held for 7 years or longer should be taxed at a rate something like 5% … well below the current long-term rates, which either need for the rates to go up or the holding period to be extended …

    Just my two cents … I expect none of these things to be remotely attractive to those in power, which is these ideas’ greatest attraction. If evil hates it, it can’t be all bad …

  8. Orange14 says:

    I’m pretty much in agreement with constantnormal’s approach even though I rely on dividends as a retirement income stream. I think the capital gains treatment as noted is also good in that those of us who hold things “almost forever” would be rewarded with lower taxes (my only worry there is that this could be jerked out from under us by a Congress looking for more money). In the long run, we do need tax simplification and probably implementation of a VAT at some point in time to tax consumption.

  9. thomas hudson says:

    agree with kass on this one for the most part, and especially agree with machinehead and constantnormal on either a lower rate or an inflation adjusted approach to long term gains (probably the former, as inflation adjusted would make calculations more difficult). the inflation component of long term gains is one of those stealth taxes that especially penalizes those who hold low yielding investments and/or non residential real estate.

  10. AlexM says:

    Barry nominated Luskin in 2008 for “Worst Calls” , why think that the guy is any smarter in 2012?

    Basically, Luskin is just another GOP flack (like Kudlow) who is trotted out periodically to idiotically spout ridiculous calls like Thurston J. Romney III.

    They know that most people will just internalize what Luskin says without doing any real analysis.

    Really, this is no different than Romney claiming to have saved Detroit – just put nonsense and lies out there and the gullible swallows it whole.

    Thanks, Barry, for once more pointing out Luskin is an idiot; too bad they don’t give you equal time on CNBS to refute his nonsense.

  11. Jim67545 says:

    Hyperbole is now a respected form of debate. Watch the word “could.” Today it covers over a multitude of sins. “The 2013 Fiscal Cliff could crush stocks.” Quite defensible a statement. After all the author is not saying it WILL crush stocks, just that there is a chance it might – whatever that chance might be. Maybe it will and maybe it won’t. Without quantifying probability (and simple opinions don’t count) one could equally say it “could” boost stocks or “could” have no effect. All of these statements are equally valid.

    On Constantnormal’s suggestion on dividends, I like it. I’d suggest though that allowing dividends to be treated as an expense should not reduce a company’s tax bracket. After all, one is taxing profits. Of course, this would reduce tax revenue and would need to be made up by increasing something else. Ohoh here comes that Norquist guy!

  12. Vivian Darkbloom says:

    “Most industry observers calculate that less than one quarter of dividends (between 20% to 25%) are paid out to taxable investors. The balance, or 75% to 80%, are paid to non-taxable investors such as IRAs, pension plans, charitable institutions, etc.”

    That sounds about right. The list should also include non-US investors, for the vast majority of which the tax rate is fixed at 15 percent by treaty and is not affected by US domestic law.

    Those things considered, I wonder why so many progressives are against lowering the corporate income tax? Don’t they realize that if corporate income taxes were lowered (or eliminated) it would, in effect, give employees a tax break on their IRA’s, 401(k) plans, employer-sponsored pension plans, etc? Unions should love it!

    If the corporate income tax were eliminated, raising the tax rate on dividends to ordinary tax rates would be uncontroversial. And, consumers, as well as taxpayers (and tax exempts) across the board would enjoy some of the benefits.

  13. Vivian Darkbloom says:

    Another thought on increasing the dividend tax rate: Corporate insiders have little reason to oppose it.

    It is likely correct that if the tax on dividends is hiked, corporations will spend more of their earnings on share repurchases. Compared with cash dividend distributions, those repurchases removing shares from the market are much better for stock prices—and the value of stock options granted to executives. They care much more about the capital gains tax rate. Per the Obama plan, that is scheduled to rise to only 20 percent—a much less dramatic increase than the proposed increase on dividends. These effects should offset somewhat any decrease in stock market indices (a different measure than total return, including cash dividends).

  14. steveg62 says:

    Why does anyone still listen to Luskin??

  15. willid3 says:

    BR isn’t the only one wondering about him,

  16. DeDude says:

    All personal income should be taxed equally. There is no reason to tax earned income at different rates from unearned income. There might be a moral argument for going the other way and put higher rates on unearned income since we want to reward work not lazy a$$ rent collection.

  17. carleric says:

    I have never received a dividend outside of my IRA and in this scenario dividends are taxed at my taxable income rate as are capityal gains. Seems fair and simple to me…probably why it will never be treated this way outside of IRAs, pensions, etc. Heck you can’t buy folks without giving them money or political patronage.

  18. Joe Friday says:

    Kass could have stopped here:

    Luskin All Wrong



    All personal income should be taxed equally. There is no reason to tax earned income at different rates from unearned income.

    Excellent point.

    A) Under the current capital gains and dividends rates, 98.3% of the benefits go to the top 20% of taxpayers, while the other 80% of taxpayers receive only 1.7% of the benefits (93.9% to the top 5%, 84.8% to the top 1%).

    B) There is absolutely NO EVIDENCE that lower rates produce any economic benefit to the nation whatsoever, which means it’s just throwing money at the Rich & Corporate, which does not work economically.

  19. efrltd says:

    An economic fact, it’s the stock buyer on the edge, the one paying the tax, who’ll set the price, and with dividends more highly taxed, they’ll bid the price down. So the tax exempts find their portfolio values decreased at market price. There can be some partial offset if finding the price lower, the tax exempts increase their purchases. But will they, having been burned by the shock effect of the jump in taxes driving the market price down. To some great extent, no they won’t buy into the falling market.
    Secondly, many tax exempt investors are only deferring, not avoiding taxes. The effect is still a cost, the discounted minus of the taxes due tomorrow. And with the baby boomers, that date is getting closer and closer.
    If this some like something from and economist, it is. The piece is what economics calling “partial” analysis. There is more backwash from dividend tax increases not mentioned. The stock market prices are not immunized from the schedules rise in taxes in 2013.
    Whether an investor, or a voter, one needs to keep the facts in mind. The pocket book is going to be seriously hit in coming years both from tax policy and other economic policies as they wash through this sick economy. Higher taxes, as fewer and fewer people are working in the productive economy, is not a prescription for an economic cure.

  20. DeDude says:


    Little people get their capital gains and dividends in IRA accounts so THOSE capital gains and dividends are off course taxed with the higher rates of regular income. The top 1% get their capital gains and dividends outside of retirement accounts so those types of income have to be given a special tax designation and be taxed at a much lower rate (or not at all if you ask the top 1% and their puppets). The system is specifically designed to funnel money to the top 1%.

  21. BillG says:

    Dedude, money in IRA accounts is only taxed once (at ordinary income rates) – either when its earned for Roth IRAs or when its withdrawn for traditional. If you do the latter you pay ordinary rates on the earnings too but since you never paid tax on the principal before that point it comes out the same as the Roth.

    For investments outside an IRA you pay ordinary rates when the money is first earned and then you pay capital gains or dividends taxes on any gains or dividends you get along the way. The little people with their IRAs are only subject to one round of taxation and thus pay what’s usually a lower effective tax and that’s why there’s contribution limits on those accounts.

  22. cognos says:

    This is a wonderful guest post. My compliments to the author (and BR).

    Luskin… PLEASE!?!… do you not understand the dominance of untaxed investors? Its like you are in kindergarten.

    Nice points by Dedude and others on how ALL income should just be taxed the same (even less for “working wages” then “capital” income).

    Finally… even the “proportionality” analysis in this article in correct. Equities will achieve the same FAIR VALUE regardless of tax rates… it will just change the proportional holding of different investors. In a world of cheap, available leverage… taxes do NOT affect asset values. Why should things be cheaper? Because at 30% dividend tax rates, individuals prefer MORE T-bills at 10bps? This is silly.

  23. DeDude says:


    If I put $3000 into my IRA (tax deductible) and make $300 in gains the total will be $3300. When I withdraw that $3300 all of it is taxed (both the original untaxed contribution and the capital gains). The whole $3300 is taxed as income at my income tax rate (at the time of withdrawal). It’s the same for 401K and other retirement accounts that regular people use, dividend and capital gains get taxed at normal income tax rates at the time of withdrawal.

  24. eliz says:

    @ TLH –

    I could live with your plan, assuming the personal deduction does not apply to dependents: “Two tax rates. Hopefully 15 to 25%. No itemized deductions. $50,000 personal deduction for each person. All income treated exactly the same.”

    In any case, I much rather see un-earned income (e.g. interest, dividends, capital gains) be taxed and earned income not be taxed.