Tuesday, October 28, 2008

The End of the Long Boom

I have been wondering how much of the market sell-off is related to the increasing likelihood of the next president being Obama, with the attendant increases in taxes for capital gains. I am thinking that people want to take all their capital gains this year to avoid the higher capital gains tax rates in the Obama years.

So I was interested this morning to see this in Investor's Business Daily:
He wants a 33% increase in the tax rates on capital gains and dividends, an increase of 16% to 32% in the top payroll tax rate, reinstatement of the death tax with a 45% top rate, and a new payroll tax on employers estimated at 7% to help finance his health insurance plan. He's also contending for higher tariffs under his protectionist policies.

Finally, he would increase corporate taxes by 25%, though American businesses already face the second-highest marginal tax rates in the industrialized world, thus directly harming manufacturing and job creation while weakening demand for the dollar.

Obama argues disingenuously that his tax increases would only affect higher-income workers and "corporate fat cats." But it is precisely these top marginal tax rates that control incentives for savings, investment, entrepreneurship, business expansion, jobs and economic growth. While he wants to tax the rich, the burden will fall on the poor and the middle class.

In their new book, "The End of Prosperity," Art Laffer, Steve Moore and Peter Tanous argue that the threat of this tax tsunami is already destabilizing our financial markets and causing capital flight from America.

They write, "Hot capital is escaping over the borders out of the United States and flowing into China, India, Europe, and even Japan. . . Starting in late 2007, foreigners started pulling their money out of the United States, and Americans started investing more abroad. Global investors are losing confidence in the U.S."

I included that last paragraph just because it is so wrong about right now. What is happening right now is the opposite, money is flowing into Japanese Yen and US Dollars. But not into investment in the stock market. And I am thinking the reason for that is the increased taxes mentioned in the editorial.

The value of stocks is based on the expected earnings for shareholders. If the shareholders are going to be hit with a higher capital gains rate, then the expected value of the earnings for shareholders is lowered. That means people are not willing to pay so much for equity investments.

The higher the probability of Obama's election, the greater the sell off.

(I am not in denial of the other factors, e.g., mortgage melt down. Just wanted to mention this one.)

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