Op ed in the WSJ on saturday. He makes an excellent case. Don't look for Obama to do anything about this as he is the one who wants to raise taxes "for the sake of fairness."
Donald Luskin: The 2013 Fiscal Cliff Could Crush Stocks - WSJ.com
Donald Luskin: The 2013 Fiscal Cliff Could Crush Stocks - WSJ.com
More at the source.Why doesn't the stock market, that most sensitive of economic barometers, seem to care that the U.S. economy faces a "fiscal cliff" at year-end? On Dec. 31, trillions of dollars in tax cuts will expire, trillions more in new tax hikes under ObamaCare will kick in, and a trillion in automatic spending cuts will begin. Yet stock prices are the highest in four years.
Maybe with the date still far away, the fiscal cliff just doesn't seem real. It's certainly being treated that way on both sides of the political divide. On the left, economists claim with a straight face that even huge tax hikes don't mattera top tax rate as high as 70%, they claim, would have no chilling effects on top earners' incentives. On the right, they just as solemnly claim even a small rise in the top rate for high earners from today's 35% to the 39.6% scheduled for after year-end will bring about economic ruin.
So perhaps the stock market has been lulled into thinking these issues are merely abstract matters of theory to be hashed out by economists on both sides. What's the big deal, so long as Apple beats consensus earnings expectations again next quarter?
The big deal is that one key element at stake here is not a matter of theory at allit's simple arithmetic. And it leads to the simple yet alarming conclusion that unless current law is amended before year-end, the stock market has to fall by at least 30%.
It's all about how dividends are taxedand the reality that we are facing the biggest single hike in dividend tax rates in history.
The market sets the price of a dividend-paying stock so that it will pay the after-tax yield required to attract capital. When the tax rate on dividends goes up, the after-tax yield necessarily goes downto restore the after-tax yield to its required level, the stock price has to fall.
Please bear with us through an explanation that involves a little arithmetic. If you are an investor, this is important.