Could Democrats Reverse Capital Gains Increase?

Although the Stock Market closed today with a dramatic high in single day totals, the market itself is in a continued state of decline. This decline can be attributed to several factors, I'm sure, but one that has been largely neglected in the business banter of today is the looming capital gains tax that will go from zero to 20 percent in January 2009. Ask people on Wall Street and they will be the first to point this out to you. That increase provides enormous downward pressure on the Dow.

We are less than three months away from a significant cut in profits, thanks to the capital gains increase. In the mind of investors, the value of stock is declining on virtually a daily basis. As each day goes by people are reminded that the stock they own is going to see a twenty percent drop overnight. This increase is one of the single biggest jumps in history. It is happening because the capital gains portion of the Bush tax cuts that contributed to historic prosperity will come to a screeching halt on New Year's 2009 and the level will retroactively return to those earlier highs.

Candidate Obama and his Democrat cohorts could easily argue against the horrors of Wall Street and make their case against wealth creation when they were in the opposition, but now they are about to control the White House and both Houses of Congress. Their commitment to wealth distribution and opposition to capitalism will now under go a serious test.

Don't be surprised if Obama and company blinks. I could see him quietly ask the Congress to suspend the capital gains tax increase or (at least) reduce the increase even before he takes power. I wouldn't be surprised if Congress complies and Bush passes it into law. It would make sense for it to happen now, under Bush and the timing of some level of improvement could be linked to Obama's Inauguration (the media would certainly help maintain the Messiah persona through such an association). Meanwhile, if Obama waits until he becomes President and pushes a suspension of the capital gains taxes, he would be exposed as a very serious hypocrite. Bottom line, Obama's philosophy is facing a very serious dose of reality. He might very well find it useful to test the power of free markets and the use of incentives in tax policies.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

What's "Down" with the Stock Market?

Wall Street is facing the biggest post election sell-off in US history. The big question, of course, is "why"? Clearly, there is no simple "cut and dry" answer to this question. It can't be attributed to any one thing, I'm sure. But one contributing factor that I think is being largely ignored by the mainstream media, is the election of Barack Obama.

Of course, we have always recognized the impact of a new President-elect on the market. Is the new President pro-business? Is he in the pocket of special interest? What about his relationship with labor? The positions the candidate had during the campaign, show up in the stock market's reaction shortly after elections.

With Obama, we have a new President that is hostile to wealth creation, saying in his nomination acceptance speech that he supports tax policies that helps work, but not wealth. In this country, the two have always been linked. Wall Street knows that, but it appears that Obama does not. Because the current Democratic controlled Congress did not renew the next year of the Bush tax cuts, Wall Street (and those of us on Main Street that own stock) know that we will currently make 100 percent of our stock sales if we do them by the end of the year, but only make 80 percent when the capital gains tax goes into effect.

Daily, our stock reduces in value because of that looming capital gains tax. Sellers know that reluctance is growing on a daily basis as we get to January 1, 2009 and the tax increase. As that reluctance grows daily, expect the market to grow south with it.

This, of course, is only one area of concern. Hours after Obama was declared President, Iran's radical leader called for the dropping of sanctions against that regime. Wall Street is concerned of how safe the world will be with Obama. Capital gains tax is only the beginning. Obama plans on dramatically raising the taxes of the most affluent. Obama has declared that he is going to try and regulate or tax some businesses into bankruptcy (e.g., coal). This too plays heavily on the minds of Wall Street. The point is, business has plenty to worry about and those jitters are showing up each day in the Dow Jones Industrial Averages.

The test for Obama is simple. Can you have policies that benefit Main Street, but are harmful to Wall Street, yet maintain a healthy economy? I have my doubts.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.