The Right Opinion

No Cliff Calamity: That's What Stocks Are Correctly Predicting

By Lawrence Kudlow · Dec. 13, 2012

Despite all the media hullabaloo about the fiscal cliff and a potential recession if none of the Bush tax cuts are extended, stock markets have behaved calmly throughout this whole period.

I'm going to guess that stocks, in their wisdom, are correctly sniffing that there will be no calamitous falling off the cliff. By that I mean there will be no $500 billion tax hike, which would be an economy killer.

Instead, after speaking with prominent Republican House and Senate members, I have come to believe the following: The GOP knows that Obama has the upper hand in this post-election battle. Therefore, they are preparing a strategic retreat.

Republicans don't want to be the party of rich people and let Obama maintain his hold on the middle class. Republicans also don't want to be the party of recession. So if no comprehensive deal is reached by President Obama and Speaker John Boehner, Republicans will not block an extension of the so-called middle-class tax cuts, which are roughly three-quarters of the total.

It's hard to know how this story will work itself out. There may be deals on upper-end tax rates, say 37 percent instead of 39.6 percent. And maybe even some lower tax penalties on capital gains and dividends.

Ideally, the GOP can get solid promises on spending cuts and entitlement reforms in return for a tax package. That tax package may include a dollar limit for tax deductions along with the rise in upper-end tax rates. Entitlement reform is also on the table. And so is a roughly $60 billion 2013 spending cut, which carries over from the across-the-board sequester. That is still possible.

But what is not possible is that House Republicans give up their constitutional prerogative to set the debt ceiling. That is their biggest point of leverage. And that leverage will carry over into 2013, as lawmakers once again attempt an across-the-board effort for pro-growth tax reform (flatter rates, broadening the base), serious structural entitlement reform and more discretionary spending cuts. This will be the battle royale of next year.

As I said, no one knows how all this is going to play out in the next two weeks. But from the standpoint of the economy and the stock market, a worst-case tax-hike scenario that would sink gross domestic product is not likely to happen.

There will be a deal to extend most of the tax cuts. And while higher tax rates on successful earners, small-business owners and investors are most definitely not pro-growth, at least the across-the-board tax-hike calamity will be avoided.

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8 Comments

Howard Last in Wyoming said:

If the Republicans had any sense (and that is asking a lot) they would send Boehner and McConnell packing. They should then refuse to pass any legislation until the Democraps agree to pass a budget that only funds things actually authorized by the Constitution. Instant balanced budget as 90% or better of the spending would be eliminated. Did anyone say when pigs fly?

Thursday, December 13, 2012 at 12:35 AM

Tom Mumford in Manchester, Connecticut USA said:

Mr. Kudlow, when you state "... Ideally, the GOP can get solid promises on spending cuts and entitlement reforms in return for a tax package. That tax package may include a dollar limit for tax deductions along with the rise in upper-end tax rates. Entitlement reform is also on the table. And so is a roughly $60 billion 2013 spending cut, which carries over from the across-the-board sequester. ...", my jaw dropped. "sold promises" from the Dems on spending cuts for giving Obama what he wants? It has never worked before. Repubs need to stick to their principles on this issue. They should do there job, which is to put forth a package that is in the best interest of the country. This constant capitulation is why they keep losing.

Oh, and this so-called "fiscal cliff" (sounds like a comptroller super hero, doesn't it?) is not as bad as all that. Why? Because if nothing is done before the end of the year and the tax rates rise (as Obama would like -- more money for his transformation plans), people never consider that something can get done in January, or in February (etc.) to put in a solid, sustainable tax plan. Don't do it under duress. If Obama was so concerned about this, he had all year to push for it, but made it a late "priority". Don't give is and please stop encouraging them to do so for "solid promises".

Thursday, December 13, 2012 at 6:27 AM

MIResident in Michigan replied:

I saw that 'solid promises' and almost choked on lunch. GOP should give Obama the tax rates he wants, minus any additional goodies, and pass a budget inline w/ Clinton's last (+ inflation), and sit back and watch the recession go deeper - and every hour on the hour declare 'we told you so'.

Thursday, December 13, 2012 at 12:03 PM

Tod the tool guy in brooklyn ny said:

That complicated, unjust tax code, of God know how many pages has to be tackled before Neo-marx renegades reach the endzone! Lets put Ben Bernanke in jail until this mess gets straitened out! QEIII is unconstitutional--there's my Tea Party plug for yaz!

Thursday, December 13, 2012 at 6:39 AM

Tod the tool guy in brooklyn ny said:

Typo-straightened out, not straitened.Merry Christmas!

Thursday, December 13, 2012 at 6:44 AM

Torp44 in Ione, Wa. said:

The last big catch-phrase was "Comprehensive Immigration Reform". Now the biggie is "The Fiscal Cliff". Any guesses what the next one will be? Does anyone else believe that it's all a preposterous shell game??

Thursday, December 13, 2012 at 9:18 AM

Wayne in Hinesville, GA said:

The Demorats have never kept a promise when it comes to spending cuts and will bambozzle the RINO's one more time if they fall for that lie. Give the Marxist what he wants and then sit back and watch the economy go into diaster mode.

Thursday, December 13, 2012 at 4:01 PM

Tod in Brooklyn, NY said:

It sure looks like the minority, is going to be paying a high price, for the stupidity of the majority(blind sheep), come January 2013. How about our Reagan-Friedman Blueprint; lower taxes-across the board, and downsize bloated govmint!

Thursday, December 13, 2012 at 5:48 PM