Why Did the Tax Cut Fail to Boost Stock Values?
In their study, the authors reach the conclusion that the dividend and capital gains tax cuts failed to boost stock values, but they do not reach a conclusion as to why. They do suggest two possible explanations. The first is that the tax cuts had little effect on stock prices because such a significant fraction of U.S. corporate stock is held in tax-preferred accounts or by non-profits and pension plans. Dividends paid on such stock were already exempt from personal income taxes and thus could not benefit from the 2003 dividend tax cut. The second possibility the authors consider is that the tax cuts failed to boost stock prices because they were temporary (scheduled to expire at the end of 2008). To evaluate this explanation, the authors compare changes in stock prices (in the period after the tax cuts’ announcement and the period surrounding their passage) among firms paying high dividends to changes in stock prices among firms paying low dividends. While stockholders in firms that
