By Doug Fabian
Finally, the fiscal cliff has been resolved -- sort of. Unfortunately, the patchwork solution on the tax side of the equation means that nearly all of us will have less money in our pockets as we begin 2013.
I say “on the tax side” because the so-called mini deal put in place yesterday pushes the issues of spending cuts and the debt ceiling off for at least another six weeks. That means more political wrangling over these issues mid-February and beyond. Hey, thanks a lot Washington!
As for the tax part, despite repeated claims by President Obama that middle-class families won’t pay more taxes this year, most everyone with a job is going to see their take-home pay reduced. The final-hour agreement on the fiscal cliff does not prevent the temporary cut in the Social Security payroll tax from expiring. What this means is that 77% of American households will, in fact, pay higher federal taxes in 2013.
If your household makes between $40,000 and $50,000 you’ll be staring down the barrel of an average tax increase of $579 in 2013, according to the non-partisan Tax Policy Center. Households making between $50,000 and $75,000 will face an average tax increase of $822.
Of course, the real pain of more federal taxes will be felt by the most successful in society, the vilified minority known derisively by some as high income earners.
The mini deal ends the Bush-era tax rates for individuals making more than $400,000 ($450,000 for married couples). The new tax will increase the top income tax rate from 35% to 39.6%. Investment taxes, a.k.a. capital gains taxes, also are going up for this group. The current rate of 15% will surge to 20%.
In addition to these new taxes, high-income earners will also pay more in taxes thanks to new levies associated with ObamaCare. According to the Tax Policy Center, households making between $500,000 and $1 million would get an average tax increase of $14,812. Households making more than $1 million would get an average tax increase of $170,341.
Of course, none of this increased revenue will make a significant dent on the federal deficit, but that wasn’t the point of the push for higher taxes on the rich by President Obama. His objective, stated clearly many times during the campaign, was to make sure the rich pay their “fair share.”
For stocks, the deal was seen as the clearing of a roadblock of uncertainty. The market surged in the first day of 2013 trade, and midway through the Wednesday session stocks were up about 2% across the board.
The good start to the year comes after a surprisingly strong year for equities. Here’s how the major averages finished up the 2012 in terms of total return:
DJIA 30 Industrials Index +7.26
NASDAQ 100 Index +16.82
NASDAQ Composite Index +15.91
Russell 2000 Index +14.63
S&P 500 Index +13.41
Not too shabby a performance, especially considering the headwinds early in the year out of China and Europe, as well as the uncertainty here at home over the election and the fiscal cliff.
So, will 2013 live up to the performance in 2012? Today certainly is encouraging, but I remain heavily skeptical that stocks can come close to equaling the upside they saw last year.
In the weeks to come, we’ll be looking at the prospects for various segments of the market, so be on the lookout every Wednesday for all the market news and analysis you need to make 2013 a most-profitable year.
Doug Fabian has continued to uphold the reputation of the High Monthly Income newsletter as the #1 risk-adjusted market timer as ranked by Hulbert’s Investment Digest.