By Charles Biderman
The US and global stock markets and economies will be immediately negatively impacted by higher US taxes, and that appears where we are headed with or without a fiscal cliff deal. It appears that the best deal we can expect, if there is one, would raises taxes by $200 billion annually. That would result in an annualized 3% drop in after-tax take home pay.
It gets a lot worse if there’s no deal, and we go off the fiscal cliff. The result of no deal will be about $500 billion in higher taxes. That would drop after tax income by a whopping 7.5% annualized. The US has not experienced that big a drop in after tax income since perhaps the 1930′s. While a 3% drop will hurt, a 7.5% drop will devastate both US and global stock markets.
Some in the media are saying that it is no big deal if we don’t make the fiscal cliff deadline because higher tax rates for a few months until there is a deal would not materially impact the economy or the stock markets over the short term. This is pure and utter nonsense.
Why can I be so certain? All we have to do is go back to 2001 to examine how both the business cycle and the stock market are dramatically impacted by significant changes in take home pay, whether up or down.
TrimTabs has the tools to do this because we have been analyzing daily withheld income and employment taxes since we realized it was available in the late 1990’s.
In February, 2001 wage and salary growth slumped to 3% after having grown between 4% and 6% yearly since 1996. So what happened to the market? Stocks sold off sharply. As 2001 went on, income growth kept trending lower until turning negative in August 2001 – a month before 9/11. Stocks kept dropping through mid 2002.
Then after tax income, aided by a late 2001 Bush tax cut, bottomed in June and started rising in July 2002. It is no coincidence that the Nasdaq bottomed that summer as well.
The rate of income growth kept rising from 2002 through October 2007, peaking at 7% around end of 2006. However, starting in September and October 2007, income growth slowed sharply from about 6% to 3% and then turned negative in 2009. The stock market peaked that October 2007 and kept selling off until the Federal Reserve intervened March 2009.
But don’t expect the Federal Reserve to help the markets the way it did starting in 2009 when it began cutting interest rates dramatically, to where we in essence have a zero interest rate policy. Since rates cannot go much lower than they are, the Fed’s impact on stock prices becomes muted.
Whether we go over the cliff and take home pay drops by $500 billion, which is a whopping 7% to 8% of current $6.6 trillion in take home, or whether take home pay drops by $200 billion, both the economy and stocks market will drop.
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