Tuesday, December 07, 2010

Will Market Rise Now That ‘Uncertainty’ Is Over?

One of the most popular talking points for the political punditocracy has been the idea that businesses are not investing because of uncertainty. In fact, business always faces uncertainty in considering investments so there's nothing new here. At least, until you realize that 'uncertainty' is code for making the so-called Bush tax cuts permanent. And now, it looks like that cherished goal is about to be realized. 

For those who believe all the talk about ‘uncertainty’, there should be an expectation that the stock market will explode upwards because the resolution of this tax issue should mean that the will of “The American People” and “The Market” has been realized. Now that the uncertainty is over, businesses will take their $1.84 trillion in cash and put it to work creating jobs. And this will cause earnings to rise and stocks to soar.

Unfortunately, nobody who makes these claims has asked business people whether this so-called uncertainty is keeping them from creating jobs. My interviews with startup CEOs suggest that startups will create jobs when the lost profit from not creating them exceeds their cost. And tax rates have very little to do with that calculation.

The latest Obama compromise reinforces the feeling that we are living through George W. Bush's third term. According to Bloomberg, Obama's compromise continues many of his tax changes that tilt the playing field in favor of the top 1%. These include:
  • Preserve Bush tax cuts. It would leave in place the 10, 15, 25, 28, 33 and 35% marginal tax rates and preserve for two years the 15% tax rate on most capital gains and dividends, and would temporarily index the alternative minimum tax for inflation.
  • Create post-Depression record low estate tax. It would set the estate tax at a top rate of 35% that applies after a $5 million tax-free allowance per individual -- that rate would be the lowest since 1931 (excepting 2010 when there was no estate tax).
To be fair, Obama's compromise goes further than Bush did in boosting the deficit. It adds new tax cuts including the following:
  • Payroll tax cut. The compromise would cut the payroll tax by 2 percentage points during 2011. By reducing taxes $800 for individuals with an income of $40,000 and $2,136 on those making more than $106,800, the deficit would rise $120 billion.
  • Equipment purchase tax cut. The compromise would allow a full deduction for equipment purchases that currently must be deducted over time -- this would "accelerate $200 billion in tax savings for companies" and boost the deficit by $30 billion.
The market is rising slightly this morning, but nowhere near as much as it would have if the vaunted uncertainty had been real. The simple reality is that Obama's opponents have pummeled him rhetorically and it appears that he is unable to fight back.


Blogger zyclop said...

...and I say, Obama does not need to fight. Everything goes swimmingly for his puppeteers.

7:48 PM  

Post a Comment

<< Home