Monday, May 21, 2007

Congress Votes To Raise Taxes

In a stunningly underreported event, Congress approved the blueprint for the 2008 budget and in it is the single largest personal tax increase in US history. Where is the media on this?

Passed essentially online party lines 52-40 in the Senate and 214-209 in the house, the budget blueprint plans to allow the personal income tax, capital gains and dividend tax rates to increase in 2008. Quoting House Budget Committee Chairman John Spratt (D. SC), "It's not the perfect solution, but it is a long step in the right direction."

How? Raising taxes has never been the answer to our "budget" problems. Cutting spending has. More money in the hands of Congress will only lead to more spending. If history has shown us anything, this is an undeniable fact. In the outline, it proposes $20 billion dollars MORE of discretionary spending than the President had proposed. How about we back out that "discretionary waste" and not pick my pocket?

Corporations have spent the last 4 years raising dividends at a 20 year record rate as a way to reward shareholders. The effect of these increases will now be negligible when the tax rate on them is allowed to almost double. Look at the chart below.

The S&P has enjoyed a smooth ride as investor have parked their money and enjoyed the steady stream of reduced tax rate dividend checks. An increase in these rates would cut the value of these dividends by almost 50% and surely lead to a huge increase in volatility. While professional traders love volatile markets, they are the enemy of the average investor who gets sideswiped by the big market swings and end up losing money.

I cannot figure out why no one is talking about this now. One thing for sure, if it passes, it will be all we talk about..

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