It is very difficult to determine how much of a market impact may be generated by the tax rate changes in the dividend and capital gains tax rates. It is hard to separate the impact of tax code changes from the economic backdrop for the stock market.

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... MORE