TrimTabs’ Biderman: Higher Taxes Means Stocks Will Plummet

Thursday, 06 Dec 2012 07:55 AM

By John Morgan

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Stock markets and the global economy face an immediate steep drop from higher U.S. taxes, regardless of the outcome of fiscal cliff negotiations, according to Charles Biderman, CEO of TrimTabs Investment Research.

The outspoken research firm founder claimed it is “pure and utter nonsense” to expect only a gradual effect if no agreement is reached by leaders in Washington by the Dec. 31 deadline.

Biderman predicted the best outcome, presuming Democrats and Republicans even make a spending and tax deal before 2013, would mean a $200 billion increase in taxes and a 3 percent drop in Americans’ take-home pay.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

But the outcome would be much worse if the talks fail — tax increases would escalate to $500 billion, which would translate into a drop in Americans’ after-tax income by a dramatic 7.5 percent, he wrote on his blog.

“The U.S. has not experienced that big a drop in after-tax income since perhaps the 1930s,” he said.

“While a 3 percent drop will hurt, a 7.5 percent drop will devastate both U.S. and global stock markets.”

Biderman said TrimTabs analyzed years of daily withheld income and employment tax data to reach its conclusions.

He said the 2001 Bush tax cuts helped revive income growth and the stock markets following 9/11. When income growth slumped again with the 2008 financial meltdown, the stock market did not revive until the Federal Reserve intervened in March 2009, Biderman said.

“But don’t expect the Federal Reserve to help the markets the way it did starting in 2009 when it began cutting interest rates dramatically, to where we in essence have a zero interest rate policy,” Biderman said.

“Since rates cannot go much lower than they are, the Fed’s impact on stock prices becomes muted.”

The Congressional Budget Office has predicted a recession in 2013 if the scheduled fiscal cliff tax increases and spending cuts occur. If no deal occurs, tax rates will increase on income, capital gains and dividends.

Employee payroll taxes are also scheduled to go up, and surcharges are due on earned income and investment income of higher-income individuals to defray the costs of the Obamacare health overhaul.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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