David Rosenberg On Taxation-Shock-Syndrome:
While nothing is more certain than death and taxes (and central bank largesse), David Rosenberg of Gluskin Sheff uncovers The Unlucky seven major tax-related uncertainties facing households and businesses that will likely lead to multiple compression in markets (rather than the much-heralded multiple expansion ‘story’ which appears to have topped the talking-head charts – just above ‘money on the sidelines’ and ‘wall of worry’, as ‘earnings-driven’ arguments are failing on the back of this quarter). As he notes the radically changed taxation climate in 2013 and beyond will have an impact on all economic participants as they will probably opt to bolster their cash reserves in the second half of the year in preparation for the proverbial rainy day.
First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.
Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.
Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).
Fourth, the top 15% rate on long-term capital gains rises to 20%.
Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners.
Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250.000 for joint filers).
Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases). The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).
Forty-one separate tax provisions expire this year — Of course, there is always the chance that after the November 6th election, a Congress that can never seem to allow anything temporary to meet its expiry date will pass an extension [of these provisions]… .
Way to stimulate the economy, Mr. President.
1 response so far ↓
1 Knox Marlow // Feb 23, 2012 at 1:00 pm
Peter,
I’ve been swamped, finally getting back to my blog and reading the other blogs. Hope 2012 is off to a good start for you.
As I’ve often said, our tax system is broken and we desperately need fundamental tax reform. However, I’m skeptical that the tax uncertainties discussed by Rosenberg will have meaningful impact on the public equity markets. In my experience, the public equity markets (and the private equity markets) are driven by large institutional investors (pension funds, insurance companies and other investors that tend to be indifferent to taxes). Unlike the WSJ editorial view, I don’t believe that increased individual taxes will have a direct causal impact on public equity valuations. The individual retail investor is sort of like the proverbial flea on the tail of the dog. Sure, enough fleas could probably cause the dog to twitch its tail. But they aren’t going to materially move the market.
I’m not defending the current state of play. Team Obama wants to use tax policy as a distraction from his woeful stewardship of the federal budget. But I do think it’s a stretch to link stock market gyrations to Team Obama’s politics of envy. The actual linkage is more subtle.
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