The effects of going over the cliff: An opposing view

Rick Moran
Are we really headed for disaster if Congress and the president fail to come to an agreement over taxes and budget cuts before the first of the year?

Some economists dispute that notion.

New York Times:

While data on the tax status of all stockholders is hard to come by, many economists agree than an increasing proportion of the entire equities market is now held by retirement investors whose holdings are not subject to current tax law; by foreign investors who don't pay American taxes, or by institutional investors like insurance companies and pension funds that are exempt from taxes.

Sam Stovall, the chief investment strategist at S&P Capital IQ, said that even among individual investors who do pay the taxes, many have incomes under $250,000 and would not be subject to the increased rates on investment income proposed by the White House. The result Mr. Stovall is anticipating is that the coming changes will cause "a lot less of a hit than most people are making it out to be."

Mr. Stovall and others who share his views are not discounting the potential disruption to the financial markets if the White House and Congress fail to reach any agreement on the broad set of tax increases and spending cuts scheduled to hit at the start of the year. The largest of these changes are not on investment income. An increase in the payroll tax, for example, could remove $95 billion from the take-home pay of Americans.

But even if a broad agreement is reached, many strategists are expecting that taxes will rise on investment income, with the White House proposing that for households earning over $250,000 the rate on dividends rise to a peak of 39.6 percent from the current 15 percent, and the rate on capital gains increasing to 20 percent from 15 percent.

Wealthy households will face an additional 3.8 percent charge on most investment income to help pay for the recent health care legislation.

Not mentioned is the hit that defense spending will take - a move that will probably cost tens of thousands of jobs in the defense industry with additional job losses in the private sector more than likely.

Coupled with that $95 billion sucked out of the economy as a result of tax increases on all Americans, it's hard not to see how we can avoid another downturn in the economy.



Are we really headed for disaster if Congress and the president fail to come to an agreement over taxes and budget cuts before the first of the year?

Some economists dispute that notion.

New York Times:

While data on the tax status of all stockholders is hard to come by, many economists agree than an increasing proportion of the entire equities market is now held by retirement investors whose holdings are not subject to current tax law; by foreign investors who don't pay American taxes, or by institutional investors like insurance companies and pension funds that are exempt from taxes.

Sam Stovall, the chief investment strategist at S&P Capital IQ, said that even among individual investors who do pay the taxes, many have incomes under $250,000 and would not be subject to the increased rates on investment income proposed by the White House. The result Mr. Stovall is anticipating is that the coming changes will cause "a lot less of a hit than most people are making it out to be."

Mr. Stovall and others who share his views are not discounting the potential disruption to the financial markets if the White House and Congress fail to reach any agreement on the broad set of tax increases and spending cuts scheduled to hit at the start of the year. The largest of these changes are not on investment income. An increase in the payroll tax, for example, could remove $95 billion from the take-home pay of Americans.

But even if a broad agreement is reached, many strategists are expecting that taxes will rise on investment income, with the White House proposing that for households earning over $250,000 the rate on dividends rise to a peak of 39.6 percent from the current 15 percent, and the rate on capital gains increasing to 20 percent from 15 percent.

Wealthy households will face an additional 3.8 percent charge on most investment income to help pay for the recent health care legislation.

Not mentioned is the hit that defense spending will take - a move that will probably cost tens of thousands of jobs in the defense industry with additional job losses in the private sector more than likely.

Coupled with that $95 billion sucked out of the economy as a result of tax increases on all Americans, it's hard not to see how we can avoid another downturn in the economy.