Markets vs. Politicians
12:00 AM, Dec 1, 2012 • By IRWIN M. STELZER
Markets move even when politicians don’t. Investors and consumers aren’t waiting for America’s politicians to decide whether and, if so, how to put our fiscal house in order. They are acting, now. Good thing, given the increasingly intransigent mood that has the president refusing to put spending on the table, doubling the increased taxes he is after, and insisting that Republicans raise the debt ceiling, now. We can hope this is posturing, but people with skin in the game aren’t much for relying on hope.
President Barack Obama and Fed chairman Ben Bernanke.
Many corporations, especially those in which founders hold large positions, have decided to declare special dividends, or to move up dividend distributions to this year to avoid tax increases next year. If the Bush tax cuts are allowed to expire, tax rates on dividend income will rise from 15 percent to 43.4 percent when the 3.8 percent Obamacare tax on the investment income of higher earners is included. Such hefty increases might be avoided, but there will be some non-trivial increases. So, when it comes to dividends, now is the time to follow Woody Allen’s advice and take the money and run.
Data-gatherer Markit reckons that by year end some 120 companies will have taken steps to avoid next year’s higher taxes, four times the average in normal years. Walmart, 48 percent owned by the Walton family, moved its dividend-payment date from January 2, 2013 to December 27 of this year, and Las Vegas Sands, in which Sheldon Adelson and his wife own roughly half the shares, declared a special dividend in excess of $2 billion.
The effects of these moves are not confined to the recipients of the payouts. For one thing, companies declaring special dividends will enter 2013 with less cash with which to make acquisitions. For another, next year there will be more share buy-backs, as companies seek to find a way to get cash to shareholders without paying dividends. “Dividends were the big thing … the new focus will be on stock buyback programs,” portfolio manager Peter Andersen told the press. Finally, politicians seeking sources of revenue with which to reduce the deficit will find that some of the sheep did not wait for the shearing—hundreds of millions of dollars will have escaped the increase in tax rates on dividends, the cash having been pocketed by shareholders by the time singing of Auld Lang Syne begins. Negotiators will have to look elsewhere to make up for this lost revenue.
Taxes on capital gains are also scheduled to jump if we jump off the cliff. There is some disagreement as to the effect of replacing the Bush-era rate of 15 percent with the 23.8 percent (20 percent + 3.8 percent to fund Obamacare) rate that is now scheduled to replace it. There is some evidence that entrepreneurs who have built decent-size businesses, and private equity firms owning companies that have prospered, are trying to sell these assets off before the New Year, but the extent of such activity and the ability to complete complicated deals in the few remaining days of the year are difficult to judge.
Investors holding shares that have chalked up gains may also be taking steps to beat the tax increases by selling now. Wharton School finance professor Jeremy Siegel reckons that selling by investors eager to beat what the politicians have in store for them in 2013 is having a dampening effect on share prices. Nonsense, says Warren Buffett, perhaps the world’s most famous investor, and a man who has won the Obama’s heart by demanding to pay higher taxes. Buffett says an increase in capital gains taxes won’t depress share prices because, with interest rates at record lows, investors have no alternative to holding shares. “What are the alternatives? Where are they [investors] going to go?” Buffett asked Stephen Gandel, senior editor of CNNMoney, at a chance meeting. In this disagreement between academic economists and the Sage of Omaha, so far the facts in the market seem to be coming down on the practical man of affairs.
One group seems too browbeaten by the demonization of their colleague Mitt Romney during the recent election to do more than watch the political show: private equity firms. Much of the income of these investors, known as carried interest, now taxed at a 15 percent rate, will be taxed at roughly 35 percent if the Bush cuts expire, and, I think, even if they don’t. Although the industry has not fashioned a robust intellectual defense of its special treatment, its lobbyists still believe they can salvage some of their clients’ advantages. But many leaders of the industry believe that this is a fight they can’t win: these sheep are for shearing, and feel that bleating will do them little good.
All of this concentration on whether a dive off the cliff is in store, and on who will pay higher taxes either to avoid that plunge or next year when some more comprehensive deficit-cutting bargain is reached, seems oddly unrelated to what is going on in the economy. Consumers don’t seem to be concerned about the fiscal cliff, and are more confident than they have been in almost five years, which was reflected in their storming of the malls and frantic clicking away on their computers and mobile devices at the start of the holiday season. They are less fearful of losing their jobs, have reduced their mortgage debt to the lowest level in six years, and are comforted by the continued recovery in the housing market. House prices rose for a sixth consecutive month in September (the latest month for which data are available), and are 3 percent higher than last year. Supplies of unsold houses are down and sales of new and existing homes are up, with a blip here and there, to be sure.
Because consumers are local, and businesses are international, bad news from recession-hit Europe, accompanied with pictures of mob scenes in Athens, affect businessmen more than consumers, who are enjoying America’s economic recovery, tepid though its pace may be. But businesses, which have been cutting spending to and into the bone, might, only might, be coming out of their funk. Orders for non-defense capital goods, excluding the volatile aircraft component, rose 1.7 percent in October. If business spending does increase significantly, a big “if,” and if consumers continue to spend on autos and houses, we just might be in for an upside surprise early in 2013, something far better than the 1 percent growth rate or worse, recession, that many economists believe will make 2013 an unhappy new year. Were the economy to grow at something like 3 percent, the deficit would become far more manageable.
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