The Effect on Stock Prices of the Expiration of the Current Maximum Rate of 15 Percent on Dividend Income

3/18/2013

The Effect on Stock Prices of the Expiration of the Current Maximum Rate of 15 Percent on Dividend Income

By Peter Harris and Constantinos Skanavis

Peter Harris is an associate professor and the chair of the accounting and finance department at the New York Institute of Technology. He possesses a number of professional designations, including the CPA license and the CFA. He has worked for Ernst and Young LLP and is an author for over 50 referred papers. He is a frequent speaker on accounting and finance issues and is a member of several professional organizations.

Constantinos Skanavis has received his Bachelor of Science in economics and regional development. He is presently pursuing his MBA in Technology Management at Stevens Institute of Technology in Hoboken, New Jersey.

 

Printed in Internal Auditing January 2013 −

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The paper addresses the question “ What effect will have on stock valuation the potential of rising tax rates on dividend income.”

The authors’ attempt through historical paradigms and the use of the dividend model to analyze their concern. They finally conclude that the dividend tax increase anticipated in 2013 would have an inversely proportional effect on stock prices if no other factors played a role. In a real world setting though, variables such as global economy, wars, and natural disasters, as well as intervening factors related directly to finances and economy, pose difficulties in financial predictions. The simplistic aspect of increasing tax on dividends with reduction on stock prices could be an imaginary scenario if it is based only on the increased taxation. The only certainty is that the resulting aggregation of the market would definitely create an agony to investors, and the inevitable fluctuations in their decisions would determine the final relationship of dividend tax increase and stock prices. The prior history on the addressed issue has taught us that predicting based on all factors associated with the market is quite a difficult, if not impossible, task. Taking into consideration past experiences and the many lessons the global economy has offered is the most prudent reaction investors can depend on. Also it is mentioned that past performance of stock prices based on dividend taxation inputs will not be a guide for future performance. Finally the authors state that further research should address the effects of various tax rates on dividend income on stock prices in other developed economies.