Obamanomics and the Stock Market

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 to enlarge images

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.

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.

Disclosure: none

Comments

[congamike:]

This article seems to ignore the fact that the Wilshire 5000 was handed over to Bush while in a steep decline. It was declining at that time from the peak of Reganomics. Bush then "did his thing" causing an all time high just a year ago. Where was Taylor to credit him for his fabulous policies last year?

Now, since the country is at war and there is a GLOBAL recession,Taylor feels justified in writing this article? I recommend a time-out for some critical thinking.

So, let's play Robin Hood and take money from the rich, They might not pass the costs on to consumers. Ya think? If they cut overhead costs by cutting jobs, we can ask the government to bail us out at tax payer expense. Does that sound like a death spiral to anyone but me?

Here is the chart:
finance.yahoo.com/q/ta...=^DWC&t=my&l=o...

2008 Nov 07 04:10 PM

[Benjamin Ta...:]

The posts main point was to say that changes in taxes to the wealthier among us will not depress the income gains from investments. It was also to show that presidential party affiliation does not have the expected affects on stock investment returns as necessarily touted in the financial media these days.

Check out this chart courtesy of the New York Times: www.brickfinancial.com... and this blog: www.brickfinancial.com...

2008 Nov 14 07:07 AM

[Robert Nabloid:]

The critical error you made is in not realizing that the Clinton days were bright because that was the first era of truly cheap debt - Americans were spending money that was not yet earned in unprecedented numbers - it does have to be paid back. (We also had a technology boom that created new efficiencies, which had nothing to do with Clinton... but, like any President, will get the credit or the blame for such external things.). The debt accumulation continued under Bush - until just recently. Eventually debt has to be paid back - and that becomes evident at the first sign of a recession - This recession started because of too much loose lending. It had far less to do with taxes than many realize, and much more to do with consumer debt levels finally reaching a threshold where they couldn't be expanded any further to keep the economy expanding. (Please note: I'm not talking about government debt, I'm talking about consumer debt. Government debt is also going in the wrong direction and the continued accumulation only adds to our problems.)

Joe-The-Dentist will do well because people will be buying more from Walmart and less from other stores... nothing more than a flock of people rushing to find the cheapest deal. In one respect, a recession helps Walmart take market share and put competitors out of business - so when the economy recovers, Walmart is an even bigger giant. It's a good investment relative to other retail! Joe should do well.

Overall, you have a weak argument at the moment. I'm sure you can make a better argument - but at the moment it wreaks of political bias and too much emphasis on taxes. I'm neither Democrat nor Republican - but even I can see both parties made critical errors that got us into this mess. (Yup, BOTH parties). PLUS, regular American consumers made some big errors. Unfortunately, we (as consumers) used debt to mask our true economic problems for quite a while. Now we can no longer use debt to mask the problems, but debt has added to our problems. The government has also been using debt to mask the problems and the outcome may just mirror the problems consumers are now facing if it continues. Consumer spending was unsustainable, regardless of the tax policy of the day. Now consumers must focus on paying off some of that debt, and so Obama shifting some taxes will have little desired outcome on consumer spending (unless consumers start spending money they don't have again).

2008 Nov 16 05:42 PM

[Paul Price:]

Our founding fathers originally only gave the vote to landowners. Their feeling was that those who paid the taxes should decide how their money was best spent to support our country.

Under Obama's proposed plan about 50% of all Americans would pay ZERO FEDERAL TAXES meaning they would have no reason to care about government spending levels since they were only on the RECEIVING end.

When you allow one group of people to vote to take from the other group for their own benefit you have sown the seeds of destruction of the entire society.

We're already well down that horrible path and Obama's fiscal policies will only hasten the process. He has proposed "tax credits" for many who now pay no federal income tax. That means having all other taxpayers pay more so that those who already pay nothing can get checks sent to them.

This is total folly. There is no free lunch.

2008 Dec 25 08:45 AM