The Bush Tax Plan - Winners and Losers
by Charles B. Carlson, CFA
Dow Theory Forecasts

By now I'm sure you've heard all about President Bush's tax plan. A centerpiece of the president's proposed tax plan is the elimination of taxes on dividends.

Why eliminate taxes on dividends? One argument is that dividends are taxed twice under our current tax system - first, dividends are taxed at the corporate level in the form of profits; and second, dividends are taxed at the individual level in the form of ordinary income. Thus, the president's tax plan wants to eliminate this "double taxation" of dividends.

I like the idea of eliminating taxes on dividends, for two reasons:

As is the case with any tax overhaul plan, there are clear winners and losers. Those coming out as big winners in this plan include:

• Dividend-paying stocks. If taxes on dividends are eliminated, the appeal of dividend-paying stocks increases. And while I don't foresee a torrent of money rushing to dividend-paying stocks, I do believe you will see investors tilt portfolios to favor dividend payers.
• Corporate executives who own a lot of company stock. It shouldn't have been a surprise that Microsoft recently announced that it was going to start paying dividends. After all, if I were Bill Gates, I would certainly want to start to collect (assuming the president's plan gets through Congress) tax-free dividends on my huge investment in Microsoft. How big will Bill Gates dividend check be? Nearly $100 million per year. If you want to know what other companies will be either boosting their dividends significantly or initiating them for the first time, all you need to do is find publicly traded companies that have lots of insider ownership (insiders being corporate executives and board members).

So who are the losers under the Bush plan? I think one big potential loser is any fixed-income investment.

Bottom line: With interest rates scraping the bottom of the barrel, plenty of investors are looking for a reason to shift money out of fixed-income investments and into stocks.

President Bush just handed them a big one.

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