For example, the capital gains tax rate went from 20% to 28% in 1987, when the 1986 tax reform act was passed. This did not stop the beginning of a rally in stocks that lasted for most of 1987, until the unrelated October 1987 crash.

The market impact of the investor tax cuts in 2003 that lowered dividend and capital gains tax rates to 15% was difficult to discern, given the geopolitical and economic environment at the time, and the impact of the reversal of these provisions may be equally difficult to discern separately from their macro context. We can see this difficulty by looking back at the stock market's reactions to the news of a proposed investor tax cut and then the passage of those cuts:

• Initial details of the 2003 investor tax cuts began to appear in early December of 2002 with a statement from President Bush providing further insight into the package of tax cuts on January 7, 2003. Stocks slumped in December and January—even around the days details came to light—as investors were focused on the impending invasion of Iraq. The performance of both non-dividend-paying and dividend-paying stocks was very similar, despite the prospects for a cut in the dividend tax rate.
  
  
• Attention returned to the tax cuts in April 2003 as competing bills with various provisions moved through both houses of Congress. There was much uncertainty as to what the final tax cut elements were to be and whether any investor tax cuts were going to be passed. The tax bill narrowly passed in mid-May with Vice President Cheney breaking the tie in the Senate. The package, including the investor tax cuts, was signed by the President on May 28, 2003. In April and May (and over the rest of the year), the stocks of low or no dividend-paying companies outperformed high dividend payers as stocks rallied powerfully and the invasion of Iraq got underway.

During both of the above referenced periods, U.S. and non-U.S. stocks also performed very similarly, with the world focused on Iraq. The impact of the investor tax cuts in the U.S. did not result in U.S. stock market outperformance. Also, low and non-dividend-paying stocks outperformed the high-dividend payers that would benefit most from the lower dividend tax rate.

It appears that the tax cuts played little or no role in stock market performance. Possible reasons may be that investors discounted the effect on future dividends since the cuts were not made permanent, or that the effects on after-tax returns were deemed negligible relative to the macroeconomic and geopolitical drivers.

A possible positive scenario to a current tax rate resolution could be realized if the outcome is better than what investors have priced in to the markets. However, it is difficult to predict the magnitude of this event even if such a positive response occurs. One factor that could undermine the impact of any positive action on taxes is that the changes to the dividend and capital gains tax rates may not be permanent. A one-year extension of current tax rates may not be as welcome as a resolution of the tax rate uncertainty.

As the year-end expiration of the 15% capital gains tax rate looms, investors may be prompted to sell to lock in the 15% rate. However, there are not a lot of long-term capital gains to be taken in the stock market with the major averages still down sharply from their 2007 highs. The selling would most likely take place in sectors that have generated the largest long-term capital gains for those investors who bought stocks in the first half of 2009.

A potential outcome of the year-end dividend rate tax hike could be a large number of public companies with a high concentration of family and closely held shares declaring and making a one-time, special dividend payment in the fourth quarter to be sure to take advantage of the 15% tax rate before it goes away.