2013 tax increase can damage your 401k: Independent Financial Advice
Posted by Don Martin on Tue, Feb 21, 2012 @ 02:47 PM
Stock crash in 2013 due to higher taxes
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An article in FT.com by Tim Bond “Equities bull run to be powered by low valuations” on 2-20-2012 claimed that soon the economy will get better due to wage inflation and this will be the catalyst for a new stock market boom. The article failed to mention how wage inflation could occur during a period of stubbornly high unemployment and lack of demand for goods and services, so I think the article was wrong.
The best measure of unemployment is the employment to population ratio which has barely changed despite huge government stimulus. The monthly increase in jobs is a very modest amount of the 125,000 monthly minimum increase needed to exceed the population growth, so the “real” rate of net job increases adjusted for population is very minimal. Thus it will take nearly a decade to recover from the Lehman 2008 crash. As long as the unemployment rate is stubbornly high then there will be no wage inflation and thus consumers won’t be able to spark a true economic recovery.
The reason the world economy has not fallen into a worse condition is because the European Central Bank provided 500 billion Euros ($650 billion) of three year loans that are basically a form of money printing. This is a type of bogus stimulus that eventually will result in a false temporary boom which will then collapse when people realize there is insufficient real demand.
Only ten months from now it will be 2013 and Federal taxes on dividends for those in the top tax bracket will rise from 15% to 39.6% plus 0.9% for Medicare for the amount of earned income $200,000 (plus the employer also pays another 0.9%) plus and other 3.8% for health care. This is a total of 45.2% which is a 300% increase from the 15% rate.
Since investors are pursuing a policy of buying stocks for dividends the may decide that since the new tax rate means 35% less after-tax dividend income then they should value their stocks at 35% lower value, thus resulting in a drop in stock prices.
Also the lower amount of after-tax income means the private sector will have less purchasing power, thus leading to a recession. A recession means corporate earnings go down and thus stock prices will go down.
I have written an article “Jobless report no threat to bears” and “Unemployment problem unsolved”.
Investors should seek independent financial advice.
