Paul Solman And Economic Theory

I saw Paul Solman, a PBS economic journalist, at an economics teaching conference in Pittsburgh in 2003. He showed us a video of his report on how the new tax cut on dividends would not affect financial markets, since companies would not actually pay dividends. As evidence, he interviewed a top executive with Harley Davidson, who did not see how the cut to their shareholders' dividend taxes would affect HD--so HD was not going to pay a dividend.

My response at the time was that both Solman and the HD executive were wrong. They were both concentrating on supply, but were neglecting demand.

People buy stock to enrich themselves. The dividend tax cut meant that people who bought stocks that paid dividends could keep more of their income; hence, after the tax cut people would be willing to pay more for stocks that paid a dividend. Therefore, companies that paid dividends would have a higher market value and would find it easier to raise money.

Sellers do not care that much about your tax bracket, except when it influences you to buy their product at a higher price. They do not care about your demand, per se. But in the market, either they respond to you or they fall behind.

Today I read on Harley Davidson's website that they pay a dividend. Economic theory is powerful.