Henry Paulson defends the dividend tax cut

Here is the closest I find to a formal economic argument from the man.  In this WSJ Op-Ed,  if my eyes catch the fine print correctly, Paulson argued that the Bush dividend tax cuts will add 5 to 20 percent value to the stock market.  (Here is my source, though I cannot find a permalink.  And here is my source’s critique of the idea, although on this screen my old eyes cannot read it.) 

I’ve never understood the Paulson argument for two reasons.  First, at least in theory paying dividends should lower the value of the firm, relative to capital gains, given the higher dividend tax rate at the time.  Dividends would appear to shift around the form in which wealth is held, pulling it from one pocket to another, rather than increasing wealth.  I am the first to admit the entire topic of why dividends are paid is poorly understood, but that uncertainty does not militate in favor of targeting dividends for early and primary tax cuts.  I would sooner cut or abolish the corporate income tax, for instance.

Second, for any given level of government spending, the wealth effects of the dividend tax cut (if those effects exist in the first place) are a transfer to equity holders and from….?  Well, that remains to be seen.  Stay tuned for your forthcoming tax increase…Some of you, that is…

Addendum: I should make the broader point that this pick is probably very good news.


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