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The first consideration in dealing with these anxieties is to remember that, in investing, all is relative. A tax hike on dividend and interest income, as well as capital gains, would, of course, reduce the take from all investments. It would not, therefore, necessarily change investors’ preference for one sort of investment over another. All might have to adjust, but none would be particularly worse off or face special burdens. Investors, naturally enough, focus just on their specific holdings, typically not worrying about the effects on investments that they do not hold. But a complete analysis suggests that dividend-paying stocks will not suffer inordinately. There is, consequently, little to gain from ill-considered portfolio shifts that would liquidate such investments to put the monies elsewhere.
The record of the past also argues against sudden portfolio shifts. When, for instance, President George W. Bush first proposed dividend tax relief in 2003, the general feeling held that dividend-paying stocks would enjoy a special lift. After all, the breaks he proposed, and which eventually passed, reduced the tax take on dividends by a full 20 percentage points—from a maximum rate of 35% to 15%—a whopping tax reduction of nearly 60%. It was generally expected that it would cause a favorable move in dividend-paying stocks and, what is more, a greater tendency among corporate managers to favor dividend payouts. But neither occurred. Any number of metrics at the time failed to uncover any such response to the tax break. Dividend-paying stocks showed no special gains. Nor, once the analyses took account of the stage of the economic cycle, was there any indication of a greater preference among companies to pay out dividends. Now that matters are moving in the opposite way, it hardly seems likely that these stocks will show any greater sensitivity.
None of this analysis dismisses the possibility of some effect. Even a seemingly uniform rise in taxes will have different effects at the margin. No doubt there is also room to cavil with past analyses of the Bush cuts. More precise estimates on a case-by-case basis might turn up differences that were otherwise not readily apparent. But such precision seldom has a place in practical investment decision making. Too many other factors almost always overwhelm the significance of fine analytical points and statistical calculations. In a practical context, then, the probabilities argue against major portfolio adjustments now, even facing a potential for broad, if not necessarily radical, increases in tax burdens.