Fisher Investments Editorial Staff
Others

Let’s Make a Deal

By, 12/08/2010

Story Highlights:

 

  • The White House and congressional Republicans agreed to a two-year extension of the Bush-era tax cuts expiring at the end of the year.
  • The deal is preliminary, but even if it's vastly altered or somehow struck down (unlikely in our view), we don't think it would halt the market's upward march much.
  • A lighter tax burden and/or less tax uncertainty are economically positive long term and ditto for waning political activism.

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The White House and congressional Republicans agreed to a two-year extension of the Bush-era tax cuts, which were scheduled to expire at the end of the year. In exchange, Republicans agreed to extend jobless benefits for 13 months. No date has been set for a Senate or House vote, but Republicans say they will procedurally block all legislation until the tax extension is approved—which may mean a vote happens relatively soon.

The nuts and bolts may change a bit between now and the final yea or nay, but here are the broad strokes. The deal extends all current income tax rates with a top bracket of 35%. The 15% top long-term capital gains tax and 15% dividend tax will likewise remain intact. The perennially revisited Alternative Minimum Tax (AMT) patch would be re-enacted for 2010/2011. The estate tax is back for two years at 35% (instead of 55%) with estates below $5 million exempted (instead of $1 million). Employee payroll taxes would fall from 6.2% to 4.2% for 2011. Business tax breaks on R&D would be extended, and businesses may write off (rather than amortize over years) 2011 capital investment in plants and equipment.

The deal is preliminary and already facing opposition from congressional Democrats. But even if it's vastly altered or somehow struck down (unlikely in our view), we don't think it would halt the market's upward march much. Tax changes have historically had an ambiguous capital markets impact, usually yielding to larger fundamental forces. That said, a lighter tax burden is economically positive long term. And lifting tax ambiguity for businesses and consumers is similarly good news (even it only shuffles it a few years down the road).

Though there might be minor edits, the package stands a decent chance of passing. Republicans control the House, and the White House needs to negotiate to maintain jobless benefits and middle-class tax cuts. Further, President Obama may be reluctant to hike taxes as long as the economy is a hot-button issue. It's likely more politically expedient for him to go along with Republicans and simultaneously heap blame on them for their hardball tactics.

Expect plenty of heated rhetoric. But under it all, note an administration moderating its stance. Waning political activism—common in the back half of presidential terms—is good news for the bull.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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