Extending Tax Cuts
July 9, 2012
7:30pm CST
Earlier today President Obama vowed to extend tax cuts for families making less than $250k per year….for a year.
http://www.cnbc.com/id/48115893
This was the first trump card that Obama had to play in this election. With a weak economy on all fronts that I can see (unemployment, job creation, modest to no economic growth, and all the while running a huge budget deficit) he is really feeling the heat. As he feels the heat Romney is obviously gaining on him. Thus when Romney gains Obama has to find a way to fight back.
So if economic numbers continue to stay soft and the equity market continues to meander what might Obama’s next trump card be? I believe that if he is pressed hard enough he could eventually say “Can’t we all just get along?” In that scenario Obama would basically say that both parties should come together and extend all tax cuts through the election and delay this “fiscal cliff” into 2014. If I were his economic advisor this is exactly what I would tell him to do if his numbers don’t look so good as we move towards Labor Day.
Why is this? The stock market hates uncertainty and in my 14+ years in this business I have never seen more uncertainty (read confusion and inaction) in global financial markets than I am seeing right now. Crisis in Europe, Greece, the fiscal cliff, etc. Take your pick. There is no better way to fix this than to give a little bit of certainty. This simple plan may be enough to get the stock market moving north into 2013 and dramatically improve Obama’s chances of re-election.
What is the alternative? All along I have thought that the idea of raising taxes at all in an environment like this is absolute madness. The stock market has gone nowhere over the past 12 years, it crashed just under 4 years ago, and the housing bubble burst 6 years ago. All along unemployment remains abnormally high. What is hiking tax rates going to do at a time like this?
I can get into a long drawn out spew of why this is a poor time to raise taxes so I’ll make it as simple as possible. Mark Twain once said that history doesn’t repeat itself but it often rhymes. Look no farther than 1937-1938. With the economy still mired in the Great Depression 8 years after the crash of 1929 and 5 years removed from the equity market bottom of 1932 President FDR thought it would be a great time to raise taxes and balance the budget. Didn’t work out so well to say the least. Note the decline from March 1937-March 1938. The Dow fell from almost 200 down to 100 for a loss of 50% in a year.
It is my belief that if Obama sticks to his guns and lets the Bush tax cuts expire at the end of 2012 we could see a repeat of 1937-1938. On the other hand if Obama decides to play nice with the other side for a year or Romney is elected I think there is a good chance that the market could have another push higher that lasts into 2013.
I think PUG & Tony C are looking for a push higher in 2013.
Would be nice if it happened… lets see what the politicians do this year.
i believe that what caused the second wave and the great depression was the overwhelming push to balance the budget at a time of extreme fiscal uncertainty and recession. i am not aware of an historical instance where fiscal austerity successfully pulled an economy out of recession. when corporations and individuals are not spending, the government is the spender of last resort. that is the situation we are in now. obama recognized this long ago and has tried many times and many different ways to spur the economy through government spending only to me by absolute stonewalling and relentless resistance on all fronts from the republicans in congress.
study after study has shown that higher tax rates on the wealthy do not hurt the economy as long as those rates stay below a breaking point (i forgot the name of it, sorry) which is approaching 60% taxation.
increasing taxes on the wealthy would not hurt the economy and would in fact free up resources to allow government spending to bolster our infrastructure, to start restaffing many positions that have gone vacant because of funding shortfalls, and perhaps ultimately to pay down our debt.
the Laffer curve is what i was talking about. the idea is that tax rates of 0% or 100% generate zero government income for obvious reasons and that there is a point somewhere that represents the maximum government revenue that can be generated. above that, people won’t work because they lose too much of their income.
The New Palgrave Dictionary of Economics reports that estimates of revenue-maximizing tax rates have varied widely, with a mid-range of around 70% (Fullerton, Don (2008). “Laffer curve”. In Durlauf, Steven N.; Blume, Lawrence E.. The New Palgrave Dictionary of Economics (2nd ed.). p. 839. DOI:10.1057/9780230226203.0922. ISBN 978-0-333-78676-5.