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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Re: Bonds and Bush Proposal to End Dividend Taxe Date: 12/7/2002 10:07 PM
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Boad,


You're asking good questions, probably a lot better than the politicians, who I presume are looking for a quick fix for stock market losses.

I'll share my thoughts—I don't have answers.

1) I don't get the chortle about muni bonds. What affect encouraging more companies to pay dividends will have on bond yields is an interesting question. Most companies, though, aren't profitable enough to be offerring dividend yields big enough to compete with bond yields, even with current low bond yields. And, if people buy stocks to get the yields, as stock prices go up, dividend yields go down. Dividends take some of the risk out of the stock market, but not enough to make it a substitute for bonds, especially if a lot of people buy stocks again in response to the dividends. I don't see why munis would be in particular trouble, as opposed to other bonds. But, you're right, if people stop buying munis (or treasuries, for that matter), other sources for funding would be necessary.

2) Absolutely fundamental question. I've been arguing that supply-side economics needs to be reexamined objectively. The stimulus to growth and innovation that comes from pushing the investment (supply) side of capitalism is crucial, especially providing working capital to legitimate start-ups and other companies pushing the envelope (whether in technology or just good entrepeneurship). The issue I've been raising is when is enough? I think the investment banking scams were enabled by too much capital being available than could be put it to good use as working capital by genuinely innovative companies. I also think a lot of successful companies retained earnings that they squandered on worthless acquisitions, bad investments, and wasteful spending on executives and their luxuries that would make the pork barrel kings on Capitol Hill look like misers. Now, as a consequence, we're sufferring through an almost complete loss of VC investment in legitimate innovators, and established companies have reduced capital spending, including on improvements that could greatly enhance efficiency—some have even cut back on R&D, which also happened in the '70s, after another bear market, with disasterous results. What we need is a common sense balance. We need plenty of working capital available when it can be used, but if companies can't use the money, it is better to return it to shareholders than to blow it on confetti. This is why the call for dividends is a retreat from the supply side, probably a necessary one, but you won't hear those who cloak themselves in the mantle of supply side admit it.

3) A lot will depend on what dividend proposal is enacted. There is no good excuse for exempting stock dividends from taxes for individuals, while taxing interest and dividends from more conservative investments. I would think a more plausible proposal is to tax corporate profits after they issue dividends, and let tax payers pay taxes on the dividends they receive. Even if the other approach is taken, if people buy high yield stocks, the yields will go down.

4) Actually, since middle class investors tend to have most of their stock investments in retirement plans, increased dividends would help them proportionally more than the wealthy who have a higher percentage of holdings in taxable accounts, but of course, any proposal that focuses on stocks helps the wealthy more than anyone else. As to what stimulates the economy best, demand side stimulus—government spending to create (meaningful) jobs, tax cuts aimed at spenders not investors—always has a stronger short term effect. However, this runs directly counter to everything the Bush administration and many Republicans in Congress claim to believe in (those of us who read actions not lips don't necessarily take these claims at face value).

5) The government interferes with the stock market all the time. What do you think Uncle Alan does with his interest rate wand (while professing to pay no attention to the stock market)? Why do you think we have long term and super long term capital gains taxes, if not as a feeble attempt to control traders and a more successful attempt to get even reluctant investors to buy stocks? What about allowing companies to put large portions of their own stock into 401ks, which is not allowed in traditional pension plans? Anyway, if anyone is guilty of smashing the credibility of the US stock market, it's not government: it's corporate executives and accounting firms and investment banks and brokerages, aided and abbetted, of course, by politicians who they had in their pockets. For most stock markets around the world, lack of credibility comes from within; unfortunately, the US markets are no longer any different, if they ever were.
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