The Trouble With Tax Cuts

Yesterday, by accident, we witnessed this spectacular moment in the history of the republic:

Leona Helmsley and Trouble
Helmsley’s mutt Trouble: new poster dog for tax hikes

Having just left a luncheon at the office of Rep. Ron Paul (R-Tex.), we were walking across the Capitol steps to get to Union Station. One of our party mentioned he had never been to the House gallery to view the floor debates. So we decided to drop in as tourists.

After negotiating the labyrinth of security, coat checks and corridors, we were ushered into three seats in the front row of Gallery booth No. 7, less than two feet behind the CSPAN cameras installed there to monitor the proceedings. A scant five minutes passed and Rep. Joseph Crowley (D-N.Y.) walked to the podium with an easel and a 5-foot picture of the late hotel heiress Leona Helmsley holding her dog, Trouble.

“Under the Republican plan,” we gathered from his speech from press reports later, “if Trouble doesn’t get a tax break, nobody else should. Under the Republicans’ plan, this country will go to the dogs. They’ll protect this little dog, but they won’t protect the middle class of this country.”

“Ugh,” we said, “We can’t listen to this.” We got up and left. In Dr. Paul’s office, we had heard how everyone in attendance had planned to vote already. Surely, the grandstanding Mr. Crowley was just getting his arguments logged into the public record.

Ha. Fat chance. No sooner had we returned home but saw the same smug photo of Helmsley featured in the lead story on Nightly News With Brian Williams. Mr. Crowley’s absurdity had actually been taken seriously… nay, lapped up by the press.

You can’t make this stuff up. “We’re all freakin’ doomed!” my friend the great Mogambo Guru would say.

In the end, Democrats got their bill passed. The so-called Bush-era tax cuts were made permanent for individuals with incomes below $200,000, and couples below $250,000.

Three members of the Liberty Caucus we met for lunch yesterday – Ron Paul, Walter Jones and John Duncan – were the only Republicans who “crossed the aisle” figuring a tax cut for some people is better than for none.

They say they’ll really get down to debating taxes when this lame-duck session of Congress is over.

Meanwhile, employers across the nation are wondering how much money they should withhold from employees’ paychecks just four weeks from now.

The IRS is dithering on issuing its new withholding tables – which usually come out in mid-November. Payroll departments need two or three weeks to plug the data into their computers.

What if nothing happens by, say, December 15? Our forecast: We’ll see one doozy of a stock market sell-off.

“Capital gains tax rate will increase from 15% to 20% if the tax cuts are not extended,” says analyst Daniel Clifton of Strategas Research Partners. “The last time the capital gains tax rate increased – on January 1, 1987, from 20% to 28% – investors realized their gains at the lower tax rate.”

Clifton says many of his clients will decide whether to hold on or sell by December 15 – a week from next Wednesday. That’s the last day to trade stocks before index options cease trading in advance of options-expiration Friday.

If Congress doesn’t act, investors will.

Addison Wiggin
for The Daily Reckoning