Over the past five months,
critics declared the dividend tax cut dead more times than Generalissimo
Franco. On Wednesday, I sat in the East Room of the White House and
watched President Bush sign it into law. From a cold start the day after
Baghdad fell, he literally dragged the tax cut across the finish line
with his own hands, one senator at a time.
Now the same people who said the dividend tax cut would never happen are telling us it won't work to stimulate growth anyway because, according to the sunset provisions in the tax bill, the 15% reduced dividend tax rate disappears like Cinderella's glass slippers at midnight on Dec. 31, 2008. Don't bet on it. This is one sunset the critics will never get to see.
The White house plan? Simple. Allow the tax cuts and the economy's natural growth hormones the time they need to improve employment, growth and net worth. Win the 2004 elections with sufficient coattails to gain two additional Senate votes and increase the Republican majority in the House. Then push the dividend tax rate all the way to zero in 2005. Who knows? Maybe they will have enough momentum to drag the capital gains tax rate down from 15% to zero as well.
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They will get help from the actions of investors and business managers in both parties. Every investor who buys a dividend-paying security to take advantage of the tax law change becomes a cheerleader for further dividend tax cuts. And every manager who increases a company's dividend payout, or sells preferred stock to pay down debt, becomes an opponent of a dividend tax increase down the road. Over the next two years, a lot of people--both Republicans and Democrats--are going to decide this tax cut is a pretty good thing.
Sunset provisions only exist as tactical maneuvers to skirt the ten-year budget projection nonsense of our Byzantine budget process. Currently, the Congressional Budget Office translates budget recommendations into projections ten years into the future, assuming that current law is frozen like a fly in amber for the next ten years. These nonsensical numbers--something like the results of projecting the position of your car ten years into the future by assuming its speed and direction remain constant the whole time--are used as the basis for budget negotiations in Congress.
The fact is that, according to the Constitution, every year there is a new session of Congress that gets to change its mind about how it raises and spends money. Ten-year projections mean nothing.
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Meanwhile, the reduced tax cuts on both dividend and capital gains income are already doing their work. Stock prices have already increased by more than 20% from their October lows, which has boosted net worth by two trillion dollars. At least part of that increase can be attributed to the possibility of a dividend tax cut. By my estimate, there is at least another 20% to come, once investors and companies have had time to restructure in line with the new rules. The obvious winners are telecom firms like Verizon (nyse: VZ - news - people ), SBC Communications (nyse: SBC - news - people ); utilities like Southern Company (nyse: SO - news - people ) and Florida Power & Light (nyse: ELB - news - people ); and other sectors that pay substantial dividends. Less obvious winners are companies that can support growing dividends over many years, such as GE (nyse: GE - news - people ) and Microsoft (nasdaq: MSFT - news - people ).
So, don't let the prospect of an early sunset deter you from revising your investment plans to fit the new tax rates. I think they are here to stay.