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Negatives Of Tax Increases

When Congress finally passed legislation sparing most from the calamity of higher taxes, the major indices soared. After all, limiting the bulk of the increases to those making over $400,000 made both political and economic sense. The move would seemingly do an adequate job of raising revenue while also perhaps finally tapping into a national deficit that now stands over $16.4 trillion.

Factor in a poll showing 67 percent of the top one percent of American earners support higher taxes and the decision to raise rates seems even more appropriate.

However, to think raising revenues is even a first step in a long process to reduce a crippling national deficit is inaccurate. Instead, raising revenues will only further damage an economy that currently stands on spending alone.

The signs of excess spending are large in number and, in many cases, too extensive to quickly correct. Take the still shaky banking sector as a prime example. By even July of 2012, approximately half of the bailed out banks had failed to repay the government. Even more disturbing was that almost two-thirds missed dividend or interest payments and a staggering 137 banks had used a government-loan program to repay their debt. Thus, to a large extent, the government was still bailing out these institutions even while being repaid.

What's worse is that all signs now point to the spending even reaching new heights. Along with the last minute deal to avoid the crippling spending cuts and tax increases came a one year extension on unemployment insurance. It was a move that may delight those struggling to land a job, but one that should anger most citizens paying higher taxes considering the $30 billion the measure costs will only be added to the deficit.

When House Speaker John Boehner announced during recent budget negotiations that spending was a problem that could not be fixed with tax hikes, his message probably went ignored by many. After all, it seems easier to merely increase revenue via those that have the financial capacity to weather the increased tax burden. However, with a deficit that rises on average $3.86 billion per day, the increased tax revenue can only go so far. Especially when such revenue only fuels more spending.

Stocks may rise for the time being or until the next budget battle gets underway in a matter of weeks. However, when the budget ceiling takes center stage, investors need to be prepared for the worst case scenario. After all, the economy can only survive in the long term with honest spending cuts and until Washington feels the same way, expect widespread volatility and ominous earnings outlooks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.