The Rally May Be Short-Term


Kelley Wright Image Kelley Wright Managing Editor, Investment Quality Trends

The signs of 'recovery' so far have not been nearly convincing, argues Kelley Wright of Investment Quality Trends, who explains what he thinks investors need to see to really believe in the economy.

What is clear (from the recent GDP report) is that consumers, investors, and companies do not behave in a vacuum. There are dynamic reactions in anticipation of events as much as there are dynamic reactions as a result of events.

By example, a significant amount of income was pulled from 2013 into 2012, which has taken place in every instance where tax increases were announced in advance.

More than a few companies borrowed billions of dollars to pay special dividends to shareholders at the then-lower tax rates. Others paid dividends in the fourth quarter of 2012 instead of Q1 2013. Moreover, many large corporations and financial institutions paid 2012 bonuses in 2012 instead of in early 2013, which is the common practice.

Consumer confidence has soured considerably. At the risk of appearing exceptionally obtuse, we can only surmise that the new tax increases in the American Taxpayer Relief Act—coupled with those in the Affordable Care Act—has begun to seep into the national consciousness.

In case you missed some or all of these items, the following is a brief synopsis:

  • a 4.6% increase in the top marginal tax rate to 39.6%
  • a phase-out of itemized deductions (mortgage interest expense, various state income, property, and sales taxes, and charitable gifts) for high-earners
  • a phase-out and elimination of personal exemptions for high-earners
  • an increase in the capital gains and dividend taxes from 15% to 20% for high-earners
  • a 3.8% surtax on capital gains, dividends, and other investment-type incomes for high-earners
  • a 0.9% surtax added to the Medicare tax for high-earners
  • a 2.3% excise tax on medical device manufacturers

In total, it's a 2.7% hit to real household income, not including the increase of Social Security taxes back to the pre-meltdown level.