Tax Cuts

Will The Wealthy Race To Dump Stocks And Other Financial Assets Before The Fiscal Cliff Kicks In?

The election results made it abundantly clear that taxes are going to be going up, and right now a lot of wealthy people all over America are trying to figure out how to best position themselves for the hit that is coming.  There are a whole host of tax cuts that are set to expire on December 31st, and many analysts are now speculating that we could see a race to dump stocks and other financial assets before 2013 in order to get better tax treatment on those sales.  Of course it is still possible that Congress may reach a bargain which would avoid these tax increases, but with each passing day that appears to be increasingly unlikely – especially regarding the tax increases on the wealthy.  Whatever you may believe about this politically, the truth is that we should all be able to agree that these looming tax increases provide an incentive for wealthy people to sell off financial assets now rather than later.  After all, there are very few people out there that would actually prefer to pay higher taxes on purpose.  If the race to dump financial assets becomes a landslide, could this push stocks down significantly late in the year?  Already there are all sorts of technical signs that indicate that stocks are ready for a “correction” at the very least.  For example, the S&P 500 has already closed below its 200 day moving average for several days in a row.  Could the “sell off” that has already begun become a race for the exits?

A lot of Americans have heard about the looming “fiscal cliff”, but most don’t really understand the specifics.

For investors, there are several key changes which will happen unless Congress does something by January 1st.

First of all, the tax rate on capital gains will go from 15 percent to 20 percent.  For those with high incomes, the rate will be even higher than that thanks to a tax increase that our politicians managed to sneak into Obamacare.  So, some wealthy individuals will see their capitals gains taxed at nearly 24 percent in 2013 unless something is done.

For dividends, the outlook is even more frightening.  The tax rate on dividends will increase from 15 percent right now to over 43 percent for the highest income earners.

We have already seen these tax increases play into business decisions that have been made in recent months.  For example, it is being reported that George Lucas potentially saved hundreds of millions of dollars in taxes by selling Star Wars to Disney this year rather than next year.

Anyone out there that wants to take advantage of the current tax rates on capital gains and dividend income better do so now, because these tax rates look like they are going to go away and they probably will not be back for a very, very long time.

According to CNBC, this makes the next couple of months an ideal time to dump stocks and other financial assets…

For many of the wealthy, 2012 is becoming a good year to sell.

They’re worried about the “fiscal cliff,” which is when tax cuts expire and spending cuts are set to go into effect at the end of the year.

Fearing an increase in capital gains and dividend taxes, many of the rich are unloading stocks, businesses and homes before the end of the year.

And the truth is that stocks simply did not have much higher that they could possibly go anyway.  Anyone that is trying to “get out while the getting is good” should take heed of what Marc Faber recently told CNBC…

“The market is going down because corporate profits will begin to disappoint, the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20 percent, in my view.”

In fact, Faber is absolutely convinced that a full-blown stock market crash is coming no matter what happens with the fiscal cliff…

“I think the whole global financial system will have to be reset and it won’t be reset by central bankers but by imploding markets — either the currency [markets, debt market or stock markets,” he said. “It will happen — it will happen one day and then we’ll be lucky if we still have 50 percent of the asset values that we have today.”

Politics and economics have always been deeply intertwined.  The results of the most recent election are going to have some very deep consequences.  Already we have seen a large number of businesses either announce layoffs or that hours for their workers will be cut back.  You can find a bunch of tweets from small business owners talking about how they won’t be hiring anyone or that they will be forced to reduce hours right here.  You can find a bunch of tweets from average citizens all over the country talking about how their hours are already being cut back right here.

With each passing day, our country is getting poorer, it is getting even deeper in debt and our economy is becoming even more unstable.  We are on a path that will only lead to total economic disaster, but the American people just voted for more of the same.

So now we will get to see how this all plays out.

Is there anyone out there that is still optimistic about what is coming next for the U.S. economy?

Why Democrats And Republicans Are Both Wrong About The Bush Tax Cuts

All over the Internet, Republican pundits are declaring that extending the Bush tax cuts will save the economy and Democrat pundits are declaring that ending the Bush tax cuts will save the economy. Well, you know what? Nothing will save the U.S. economy. The U.S. government is going to continue to drown in a sea of debt no matter what happens with these tax cuts. State and local governments are also going to continue to drown in a sea of debt. Thousands of factories and millions of jobs are going to continue to be shipped overseas every single year. America is going to continue to transfer tens of billions of dollars of its national wealth to foreign nations every single month. Nothing that the Republicans and Democrats are debating right now is going to do a thing to alter the fundamental problems that the U.S. economy is facing.

Not that I personally do not like tax cuts. I would like my own personal income taxes to be cut down to zero percent please. I will take as many tax cuts as I can personally get.

And it is absolutely undeniable that the federal government is already handed way, way, way more money than it ever should need. Starving the federal monster of cash is a good thing. We need a much, much, much smaller federal government. But the odds of us ever returning to the kind of limited central government envisioned by our Founding Fathers is somewhere between slim and none and slim just left the building.

So aren’t less taxes always good? Well, not necessarily. You see, the federal government is planning to spend much more money in the years ahead. When you combine significant tax cuts with huge increases in spending you get lots more debt.

Extending the Bush tax cuts (and throwing in a few extra ones) will help the U.S. economy in the short-term, but without accompanying brutal spending cuts it will make our long-term debt problems even worse.

But most of our politicians don’t think about the long-term. Most of them just want the economy to turn around in the short-term so that they can get re-elected.

For example, Barack Obama is not completely stupid. He realizes that these tax cuts are probably his best shot at a short-term economic boost. If the economy starts to get back to “normal”, it may be just enough to get him another term in office.

And self-preservation is what most U.S. politicians are most interested in.

Meanwhile, we are heading for a national debt nightmare that threatens to destroy our financial system and plunge us into national bankruptcy.

But if our politicians did attempt to make the brutal spending cuts that would be necessary to balance the budget, most Americans would start screaming bloody murder. The truth is that the American people have become dependent on the government and they like getting their checks, their handouts and their government contracts.

Okay, so what will this deal that Obama has made with the Republicans actually do?

Well, it will extend most of the Bush tax cuts for two years (right up through the 2012 presidential election). The following are some of the details….

*All income levels will continue to be taxed at the lower rates instituted by the original Bush tax cuts. That means that the highest rate will remain at 35 percent.

*Barack Obama claims that extending these tax cuts will save the average American family approximately $3,000 next year.

*The 15 percent rate on capital gains and dividends will be continued.

*As part of the package, Republicans have agreed to a 13 month extension of long-term unemployment benefits.

*One new tax cut included in the deal is a reduction of the Social Security payroll tax by two percentage points for one year. So for a year U.S. workers will be paying just 4.2 percent instead of 6.2 percent.  Barack Obama believes that Americans will save $120 billion next year from this tax cut alone. For the average American family, it will mean that they will have approximately an extra $1000 in their wallets.

*The existing $1,000 child tax credit will be extended for the next two years.

*Another tax cut that is new would allow U.S. businesses to immediately expense all business investments in 2011. The Obama administration is claiming that this tax cut would be the biggest “temporary investment incentive” in American history.

*A compromise was reached on the estate tax. There will be an estate tax exemption of 5 million dollars per person and the maximum rate will be 35 percent.

So how much will all of this cost?

Well, all over the Internet the Democrats and the Republicans are arguing over figures.

One figure that is being thrown around quite a bit is $900 billion over two years.

But what is another $900 billion when we are already caught in a death spiral of government debt?

The IMF was already projecting that federal government debt was going to exceed 100 percent of GDP by 2015.

So how soon will we get there now?

Today, our national debt is more than 13 times larger than it was just 30 years ago….

So can’t we just “grow” our way out of this debt?

Not a chance.

Reducing taxes and increasing government spending will both stimulate the economy in the short-term, but both of them will always cause government debt to go up.

The sad truth, as I have written about previously, is that it is now mathematically impossible to pay off the U.S. government debt.

If you took every dollar out of every single wallet, out of every single mattress and out of every single U.S. bank and sent it to the government you wouldn’t even make that big of a dent in the national debt.

So can’t the U.S. government just go out and create more money and solve the problem?

No.

You see, under our system the creation of more money is also the creation of more debt.

As long as the Federal Reserve system exists, the U.S. federal government will be trapped inside a perpetual debt machine.

The best we can hope for is to slow the expansion of government debt down to a reasonable level.

But as I explained in a previous article, it is extremely unlikely that the U.S. government will ever have a balanced budget ever again.

The U.S. government currently has to borrow approximately 41 cents of every dollar that it spends.  The spending cuts that would be required to slash that much out of the federal budget would be beyond draconian.

Sadly, the truth is that even the really bad official budget deficit figures severely understate the extent of the crisis that we are facing.

If the U.S. government was forced to use GAAP accounting principles (like all publicly-traded corporations must), the annual U.S. government budget deficit would be somewhere in the neighborhood of $4 trillion to $5 trillion.

So anyone who thinks that we are just a “tweak” or two from fixing U.S. government finances is living in a world of delusion.

Unfortunately, the years ahead look downright apocalyptic.  After analyzing Congressional Budget Office data, Boston University economics professor Laurence J. Kotlikoff concluded that the U.S. government is facing a “fiscal gap” of $202 trillion dollars.

But the American people don’t want to hear this.  The American people don’t want to hear that there are serious consequences for running up the biggest debt in the history of the world.  The American people just want to be told that there are smart people working on the problem and that they are on the verge of “fixing” it.

But it is all a lie.  We can keep trying to “kick the can down the road” for a while longer, but eventually a day of reckoning is going to come and it is going to be painful beyond imagination.

Somehow we have the arrogance to believe that our children and our grandchildren should pay back all of the debt that we have accumulated.  What we have done to future generations is beyond criminal.

America has enjoyed the greatest party in the history of the world, but eventually it is going to be time to turn out the lights.

For now, however, the Republicans and the Democrats are busy trying to figure out ways that they can keep the party going for a little while longer.

Perhaps they can just slash taxes all the way to zero and the federal government can just borrow all of the money that it needs.  At least that way we wouldn’t be endlessly pouring our own money into the financial black hole called the U.S. government.