So it’s not surprising to see cracks developing among the Democrats, who once ranted against the Bush tax cuts. In the Senate, three Democrats have come out in favor of extending the Bush tax cuts for everyone – Sens. Ben Nelson of Nebraska (not a surprise), Evan Bayh of Indiana (a mild surprise because he doesn’t have to run for re-election), and Kent Conrad of North Dakota (a genuine surprise because of his strident anti-deficit rhetoric).
After years of warning apocalyptically about deficits, Conrad surely must realize that in the short run deficits have virtually no impact on interest rates. He and other Democrats would emphasize that the extension must be temporary, probably for no more than two years, and even a one-year extension can’t be ruled out. But a very short extension could greatly lessen any positive impact on consumer attitudes and spending, former Fed Gov. Gramley warns.
And that raises a key issue: extending the Bush tax cuts for everyone obviously isn’t like a fresh tax cut. It simply means that some very negative developments for the economy would be delayed – the top individual rate would not rise from 35% to 39.6%, the top rate for capital gains wouldn’t rise from 15% to 20%, the top dividend rate wouldn’t rise from 15% to 39.6%, etc.
But for investors, who were bracing for huge economic uncertainty this fall, then a potentially major tax hike on Jan. 1, this sudden shift of political attitudes is potentially quite bullish. Again, we still worry that final resolution may not come until December in a lame duck session, but the new consensus quite clearly is that any kind of tax hike could damage the economy next year – and that attitude shift is a significant plus for the stock market.
Greg Valliere is Chief Political Strategist at the Potomac Research Group, a Washington-based firm that advises institutional investors on how government policies affect the markets. Greg has covered Washington for over 30 years, starting his career as an intern at The Washington Post, then co-founding The Washington Forum in 1974 to bridge Wall Street and Washington. He has held several positions, including Director of Research, for Washington-based firms, including the Schwab Washington Research Group. Greg is an exclusive commentator for CNBC-TV, where he appears regularly on most of the network’s programs.