The US Senate on July 25th voted to cut taxes. The Republican proposal to extend the current tax policy was defeated. It shall be interesting to see what the House of Representatives does. Should the House decide to reduce taxes, it might take the tax side of the fiscal-cliff off the table and provide some certainty for business and investors. That could be a positive catalyst for the stock market.
Given the talk over taxes. It was decided look at the tax liability and perform the calculation for a married couple with $237,700, $383,350, $500,000 and $1,000,000 in income. The results came as a surprise given the talk of higher taxes.
It is assumed that gross income equals taxable income, to provide the more conservative tax liability figure. Granted most may not pay this amounts thanks to deductions. Think of the figures as the worst case, before deductions and or the cost of tax preparation.
A married couple with $237,700.00 in income would have the following tax liability.
- $63,035.00 under the current law
- $54,490.50 under the President's budget
- $55,643.00 under current policy
The President's budget provides $8,544.50 in savings versus current law. That in my book is a tax cut. Actually the President's budget shows the lowest tax bite.
A married couple with $383,350.00 in income would have the following tax liability.
- $115,469.00 under current law
- $106,924.50 under the President's budget
- $103,707.50 under current policy
The President's budget is lower than current law, that counts as a tax cut. The current policy has the lowest tax bite.
A married couple with $500,000.00 in income would have the following tax liability.
- $157,463.00 under current law
- $148,918.50 under President's budget
- $142,202.00 under current policy
The President's budget reduces taxes from the current law, a tax cut. The current policy shows the lowest tax burden.
A married couple with $1,000,000.00 in income would have the following tax liability.
- $359,662.40 under current law
- $351,117.90 under President's budget
- $319,535.00 under current policy
The President's budget reduces the tax burden versus current law. The current policy shows the lowest tax bill.
The budget of the President at all income levels reviewed provides for lower taxes compared to the current law. This is a good thing.
Source data from the Tax Policy Center.
Should the Senate and the House pass the budget, then maybe business could stop worrying about an increase in taxes and enjoy a tax cut. It might assist the stock market to regaining it footing.
Current Law versus President's Budget:
President's Budget versus Current Policy:
Taxes under the budget of the President is lower than under current law. Everyone enjoys a tax cut, the wealthy too. However, under current policy (Bush tax cuts in place) a small segment of the population would face a tax increase assuming the data from the Tax Policy Center is accurate.
This is a simple analysis of the tax rates looking solely at worse case. Some income enjoys special treatment and some income is not subject to tax as a result of the standard deduction ($9,800 under current law, $11,700 under President's budget and $11,700 under current policy) and the personal exemption of $3,750.
Reducing uncertainty should be good for business and investor confidence. This is turn might bring cash off the sidelines and into the stock market. The bond market might see a reduced fear bid. The economy could see a picking in growth. Stocks could climb as earnings grow with p-e expansion.
Bottom-line lower taxes could be good for the economy, the stock market, investors, employees and taxpayers. It would be nice if the House passed the Senates tax bill. It would provide the winner of the November election a year to revamp the tax-code and lift the cloud of uncertainty. Time will tell what happens, but the economy and the stock market could lift off if taxes are cut.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.