Two More Things 2012 Will Bring

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Long-term rates on capital gains rise to 20% (for higher tax brackets) at the end of 2012. Plus an added 3.8% Medicare tax tacks on to capital gains! The existing rate is 15%, so that’s a 59% increase in the capital gains tax rate (from 15 to 23.8). This will cause (at least) two things to happen. One, people will realize capital gains in 2012 to avoid the higher rate in 2013. This effect will probably depress the stock market starting maybe around August and going to the end of the year. Second, the cost of capital goes up significantly. This causes business to cut back on projects (investment). Growth and productivity slow. The economy slows down. This happens gradually, but it’s a long-term powerful effect. Just what we need, right? Another recessionary jolt. Remember, we are still in the recession that began in 2008. The banks are still in bad shape with overstated assets. Europe is the current stress point.

Capital will flee the U.S. more quickly as this and other taxes rise in the future — to pay for government spending. It’s as if Uncle Sam didn’t want us to invest in stocks and business. He’d rather we buy his bonds at a paltry 2% and take a loss due to inflation being 6–8% or higher. But these bonds have not only price risk but their default and inflation risk go up when the economy slows. As I say, capital will be looking elsewhere for places to invest.

1:53 pm on December 17, 2011