The American Enterprise Institute's Kevin Hassett writes in a Bloomberg News column:
The other way the tax hike will rekindle the recession is through its treatment of dividends. Absent action by the Democratic majority in Congress, which seems increasingly unlikely, the current 15 percent top tax on dividends will rise to the top income tax rate --39.6 percent in 2011, which, again, will grow to 44.6 percent.
This massive increase will reduce the desirability of equities, significantly harming the stock market, while giving firms a powerful incentive to pay dividends this year, while the rate is lower. Businesses may well focus on paying out cash in the second half of this year -- not a terrible thing, but not as helpful to the recovery as spending the money to expand their operations.
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The correct policy response is to extend the Bush tax cuts for all income levels, giving small businesses and shareholders cause for renewed optimism, while enacting spending cuts to preserve budget discipline. The alternative idea, to tax the economy into oblivion and then try to revive it with more Keynesian spending, is tragically wrong-headed.
The left, of course, will protest that they aren't trying to "tax the economy into oblivion," just aiming to restore the rates that applied at the end of the Clinton-Gingrich period, which featured strong growth (at least until the collapse of the dot-com bubble.) Still, Mr. Hassett's observation on the effects of the coming tax hikes on the market, like Larry Kudlow's, are worth considering.
