Published November 10, 2008
Wall Street is engaged in a test of wills with President-elect Barack Obama. The market, which dropped one thousand points last week, is not going to recover until the next president forswears his plans to raise the capital gains tax. In our book Fleeced we predicted that the Dow would crash after an Obama election because of fears that he will raise taxes, particularly the tax on capital gains.
As we argued in Fleeced, even an unsophisticated investor realizes that if he sells now, he will only have to give the government 15% of his profits whereas if he waits until Obama takes office, he may have to fork over an additional five to fifteen percent of the profits to Washington. Any moron can tell it makes sense to sell before the tax hike kicks in. And since these increases are usually retroactive, investors will take care to sell ASAP rather than wait.
So Obama is in the position of asking people to have confidence in the markets, even though he proposes to as much as double their taxes should they succeed.
The collision course between Obama’s leftist ideology and the reality of the markets could not be more striking. The president-elect is surrounded by economic advisors who want to raise capital gains taxes, as much because of their ideology as for any practical benefit. Dick recalls vividly his meeting with Bob Rubin when he was Treasury Secretary under Clinton. Rubin opposed any cut in the capital gains tax even though he admitted that a cut in the tax would not cut, but might even augment, government revenues. Obama, himself, defended an increase as a matter of social fairness in the campaign debates when he was asked whether he favored increasing the tax even though history showed that a higher tax did not generate increased revenues.
Now Obama will have to choose between ideology and reality. Unless and until he pledges to abandon his plans for higher taxes, he will find nothing but bad news in the business sections of the nation’s newspapers. He can claim all he wants that the crash is due to Bush’s policies, but the fact is that the market advanced during the last week of the campaign when it looked like McCain was gaining and then fell sharply in the two days after Obama’s victory.
Depressingly, many of the predictions in Fleeced are now likely to come true, from the overloading of our health care system and the resulting rationing of health care to the weakening of the Patriot Act. We will report on these as they unfold, hoping to generate a climate of moderation and pragmatism in Washington. LOL.