Stocks Pay Price Of Coming Tax Increases

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Stocks Pay Price Of Coming Tax Increases

By GROVER G. NORQUIST | Posted Thursday, October 30, 2008 4:20 PM PT
Some Americans are concerned that if Sen. Barack Obama is elected president, his plans for higher taxes on personal income, capital gains, dividends and corporations will damage the economy.
It is a little late to be worrying about this. We are already in the midst of the Obama recession. But to be fair, we should give House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid at least equal billing.
Why has the stock market collapsed? Why wouldn't it?
In 2003, the Dow stood at about 8000. The then-Republican Congress and President Bush reduced the capital gains tax to 15% from 20% and the tax on dividends to 15% from 35%. In the next three years, the Dow rose 50% to 12,000, and household net worth rose to $56 trillion from $40 trillion.
This is the "wealth effect" of taxation. If you own stock in a company and the tax on earnings by that company is reduced, the value of the stock increases. If taxation on the company is increased, you would pay less for the same stock.
Microsoft stock is worth less if you attach the boat anchor of higher capital gains taxes, higher corporate income taxes and higher dividend taxes. But this is not what will happen if Obama is elected. It's what already happened on Nov. 7, 2006, when Democrats won the majorities in the House and Senate.
The tax cuts of 2003 that sparked the increase in national wealth are scheduled to end on Jan. 1, 2011. It does not require a President Obama to make those taxes increase. All it requires is for the Democrats to control either the House or the Senate with enough votes to stop legislation to extend the tax cuts.
And the top individual tax rate, now at 35% but also paid by many small businesses, will snap back up to Bill Clinton's 39.6% on Jan. 1, 2011.
Pelosi and Reid both voted against the tax cuts of 2001 and 2003. We know where they stand. Every Democrat in the House and Senate has voted repeatedly for higher taxes since that party became the majority in January 2007, and House Ways and Means Chairman Charlie Rangel has unveiled his "mother of all tax hikes" to increase taxes by $38 billion over 10 years.
Presidents don't cut taxes or raise taxes. They sign the bills sent to them by Congress.
Obama originally campaigned for raising the dividend tax to 39.6% from 15%. Then, when his contributors from Wall Street pointed out how devastating that would be to the stock market, he changed his rhetoric to calling for an increase to "only" 20%. But if Congress does nothing, the dividend tax increases to 39.6% on Jan. 1, 2011.
Americans for Tax Reform worked with John Rutledge to calculate how Obama's and McCain's tax policies would affect the stock market. The calculator appears at ATR's Web site, www.atr.org.
You can enter the size of your 401(k), and it will calculate its value under four different scenarios: if Obama's tax increases pass; if McCain's tax cuts are enacted; if Congress' plans are enacted; and if Americans for Tax Reform's fantasy tax cuts, including abolishing the capital gains tax, were made law.
The Obama tax plan will reduce the value of the stock market and your 401(k) by 6%. The House Democrat plan will drop the market by 16%. Remember, Obama cannot impose his tax plan — he has to sign what Congress sends him, so Congress' tax plans are more important than Obama's campaign speeches.
If Republicans won the House and Senate and McCain's tax plans were enacted, the market and your 401(k) would increase by 46%. And if you pass the McCain plan and add ATR's abolition of the capital gains and dividends tax, the market and your 401(k) would increase by 58%.
But the market can read the newspapers and is aware that the Democrats control the House and Senate now and likely will for the next two years. This means the market gains since 2003 due to lower capital gains and dividend taxes will disappear.
The market has already begun to drop in anticipation of the coming tax increases. The Pelosi-Reid-Obama recession has already started.
Of course, if Obama and the Democrat leaders in Congress have tax hikes and regulatory burdens planned that they haven't shared publicly, the market will drop even further. It can get worse.
Norquist is president of Americans for Tax Reform and author of "Leave Us Alone: Getting the Government's Hands Off Our Money, Our Guns, Our Lives."