Liberal Tax Revolt Game-Changer?

By Lawrence Kudlow (Archive) · Wednesday, July 28, 2010

The liberal tax revolt, as The Wall Street Journal is calling it, is a very important topic -- especially for investors and small-business entrepreneurs. And for new jobs.

The so-called revolt is comprised of three Democratic senators: Kent Conrad, Evan Bayh and Ben Nelson. They want to extend all the George W. Bush tax cuts. That includes taxes on the wealthy, or the top personal tax rate, the investment taxes on capital gains and dividends, and the estate tax.

So is this revolt a game-changer, or merely wishful thinking?

With a strong pushback against the revolt by President Obama, Treasury man Tim Geithner and House Speaker Nancy Pelosi, right now it looks like wishful thinking. But with Democrats getting badly paddled in various polls, you never know.

When Tim Geithner told me in a CNBC interview a few weeks ago about his 20-20 rule for the top tax rate on capital gains and dividends, I blogged that this was a good thing -- in particular the story for dividend taxes, which could go to 39.6 percent. But no increase at all on investment taxes would be even better.

Let's say you're an investor who went long stocks in March 2009 and now has a long-term capital gain. You could sell right now at a 15 percent tax rate before it goes up to 20 percent. In a nutshell, this is the tax-hike story that has hung over the stock market this year like the proverbial Sword of Damocles. Year-end tax-related selling could still be in front of us.

So the liberal tax revolt is a very important issue for investors. It could mean a potential stock market rally in the second half of the year.

It's also important for job-seekers. Just take a look at the new Investor's Business Daily poll by the accurate surveyor Raghavan Mayur. He notes that the average length of joblessness has soared to over 35 weeks, nearly two times greater than the previous high for any downturn. And his polling data show that nearly one-half of households can be categorized as "job-sensitive." That's a huge number. These are the people who are either looking for work or fear that they may be laid off -- or both.

Regarding the direction of the country, confidence in the job market, the likelihood of a second recession and satisfaction with federal economic policies, Mayur's polling shows that the large job-worrying population is extremely pessimistic. Come November, that's going to translate into votes against the Democratic Congress. And this pessimistic, jobs-sensitive group is undoubtedly thinking, along with the tax-hike-revolt Democratic senators: What sense does it make to raise taxes on anyone? Or on any business, large or small?

Then there's the confidence-threatening war between business and the White House, which is also related to the liberal tax revolt. It's still a battle royale between the nation's business leaders and the administration over taxes, spending, regulation and trade.

Treasury man Geithner made light of this war at a Christian Science Monitor breakfast this week. A Daily Caller headline read, "Geithner Bored by Complaints from Business about Obama Policies." White House chief of staff Rahm Emanuel also doesn't seem that concerned. In a Wall Street Journal interview with Jerry Seib, Emanuel was a bit more conciliatory about reexamining regulatory issues, but he was still inconclusive.

There are two big things that businesses want right now: One is an across-the-board corporate tax cut, including cash expensing for investment. This is the single most powerful job-creator of all. The other is a senior business executive in one of the key economic policy slots in the White House. Neither of these requests seems to be on the table. But to conclude that the White House is burying the hatchet with business you'd have to see these conditions met.

So far, it ain't happening.

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