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Obamanomics And The Stock Market

Source: http://www.flickr.com/photos/digitalparadox/2992094285/ 

Meet Joe-The-Dentist

Joe-The-Dentist earns over $600,000 per year. Although he earns a high income from his dental practice he also earns a good bit of income from capital gains from his stock holdings of publicly traded companies. Most of Joe’s holdings are in consumer oriented businesses. His largest holding is Walmart stock.

Unfortunately, Joe has seen his passive income from stock holdings decrease during the Bush administration – a period of low tax rates. Gone were the days of the Clinton era bull market – a period of high taxes. So Joe hasn’t paid much in capital gains as of late, because Joe’s passive income hasn’t been much to brag about.

Joe has an epiphany. Obama’s tax plan is very Clintonesque and middle-class oriented while the McCain plan is an aggressive version of the Bush tax policy which heavily favors the wealthiest Americans.

Joe contemplates if the middle-class had more income to spend, they might spend it at Walmart. Which means Walmart’s revenues would go up, which would increase the value of the stock, which would in turn allow Joe to have more passive income. Joe also realizes the even though he might pay a higher tax rate under an Obama/Clinton tax policy, it would mean little as his take-home-income would be at its peak. Under the McCain/Bush plan, middle-class incomes would be relatively lower, not allowing them to spend as much thus stalling the economic recovery, depressing Joe’s stock holdings.

Joe-The-Dentist as well as the average American need only look back at the last 16 years. Paying lower taxes will not necessarily, as smart people like Warren Buffett have pointed out, hurt economic decision making. Thus an Obama/Clinton tax policy will help all Americans by helping the middle-class. The following chart shows how the stock market performed during the Clinton administration (from the time of the election in 1992) to how it performed during the Bush administration. Under Clinton, the stock market nearly quadrupled while under Bush the market stood still.  [Click chart for larger view.]

Source: Tax Policy Center 

Implications for the National Debt

Much of the argument from the John McCain camp against voting for Barack Obama is that Obama will raise taxes. The truth of the matter is Obama simply wishes to return to the modified Clinton administration tax policy. Under such a plan very few of us will see a rise in our overall tax rate and most will see an increase in their take-home-income.

According to the Tax Policy Center (TPC), the wealthiest among us, the top 1% of households with incomes of $600,000 per year or more, would see their after-tax income decrease under the Obama/Clinton plan by about $19,000 representing a mere 1.5% decrease in after-tax income. The next 4% of households would see their after-tax incomes remain about the same. Most Americans, about 95% of households, would see their after-tax income increase by about $2,200 per year.

McCain espouses a Bush-like “trickle down” tax plan which aims to cut taxes across the board. His plan leaves most American with an increase in after-tax income of about $1,400. But his plan most favorable to the wealthiest Americans. The top 1% under the McCain plan would see their after-tax incomes rise by $125,000, according to TPC. [Click chart for larger view.]

Source: Wilshire Associates 

Each of the candidates’ tax plans has implications for national debt. It can certainly be argued the McCain/Bush tax plan will cost the nation more in the long run. According to the Tax Policy Institute (TPC),  

“The main differences are two: first, McCain’s plans would reduce revenues by significantly more than Obama’s; and second, McCain’s would be substantially less progressive, especially among very high income taxpayers.”

The McCain/Bush policies would cost (reduce tax revenue) $4.2 trillion over 10 years while the Obama/Clinton plan would cost $2.9 trillion during that time. If interest costs are included, McCain’s plan would boost the national debt by $5.1 trillion and Obama’s would increase it by $3.6 trillion. 

However, as the above anecdote suggests income for everyone, even the government, will potentially be higher under an Obama/Clinton tax policy. Even though both candidates’ tax plans will be expensive, the Obama/Clinton plan has relatively more upside for the economy than the McCain/Bush plan. Basically, under the Obama/Clinton plan, all boats will rise.

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About Brick Financial Management, LLC

Blogged by Brick Financial

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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure


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