30: The Tax on Dividends: Speculations On How Taxation Changes Might Affect Investor Strategies

Speculation has heightened that the Bush administration will seek to reduce or eliminate the double taxation of dividends paid on corporate stocks. While the form and substance of such a policy are yet unclear it would, if enacted, impact private client portfolios in several significant ways. Most obviously, reducing or eliminating the taxes levied on dividends would improve equities’ after-tax total returns relative to other non-affected asset classes such as bonds or alternative assets. In this paper we will initially seek to illustrate how a typical investor’s recommended asset allocation might change if the elimination of taxes on dividends were to become a reality. Second, it is likely that such a tax law change would indirectly impact other asset classes and alter the behavior of corporate management.

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