Dividend tax cut apologists have long asserted that the dividend tax cut must have caused a big a boost to the stock market. They’re able to do this because they choose to benchmark their analysis from the worst months of anxiety over the possible economic ramifications due to the Iraq invasion and then assume that any rebound must be caused by dividend tax cut.
The Federal Reserve study, however, did away nicely with those assertions in two ways. First, it looked at how much US stocks rose compared to European stocks at key points to test the link between the stock market rise and the dividend tax cut (which those investing in Europe would be unlikely to benefit from).
The result: US companies did not outperform their European counterparts during the key periods when the dividend tax cut was proposed or looked likely to pass (“the S&P; 500 did not outperform a comparatively broad index of European equities”) suggesting that the upswing in 2003 was due to reduced anxiety over negative economic impact of the war rather than the dividend tax cut. Indeed, when looking at the improvement of non-dividend paying stocks, the study concluded that “it seemed to be linked to an upswing in investor sentiment that accompanied the resolution of uncertainty regarding the commencement of the war in Iraq”””not the effects of the Bush tax cuts.
Second, they looked at how dividend stocks did against real estate investment trusts (REITs), which would be completely unaffected by the dividend tax cut. Again they found “near zero” deviations in returns that would suggest stocks took a boost from the tax cuts. The study concludes that “US large cap and small cap indexes did not outperform either their European counterparts or REIT stocks during the event windows, regardless of how broadly those windows are defined.”
— Gene Sperling