as part of our
Forget Manic Mondays. In the
Wall Street Daily Nation,
we celebrate Myth-Busting Mondays.
For the newbies in the group, each week I pick a widely held
belief and use the Hammer of Truth to smash it into a billion
little pieces. None have survived yet. But eventually, I expect to
find a topic that can withstand the onslaught.
If you know of any potential contenders, feel free to share them
with me at
Right now, though, it's time to tackle a politically charged
topic. (I know. The gall!)
But if you think politics and finance don't mix, you're sorely
mistaken. The overlap is undeniable. Policy in Washington directly
impacts profits on Wall Street.
I mean, did you see what happened to the markets during the
whole "Fiscal Cliff" debate? And what about healthcare stocks
during every jot and tittle of the healthcare reform debate?
Like I said, politics and finance
mix. With that in mind, let's dive right into dispelling the
stubborn little myth that taxes don't influence behavior.
Here's irrefutable proof that tax rates do, indeed, influence
And lest you think I'm about to go on a tirade against taxing
the rich, I'm going to start off by addressing the impact taxes
have on everyday Americans…
Say "Hello" to the 2%
This has nothing to do with the Occupy Wall Street Movement (the
99% versus the 1%). I'm talking about the end to the 2% Social
Security payroll tax holiday that occurred in January.
Believe it or not, that little "extra" being taken out of
everyone's paycheck is having a big impact.
For instance, weekly retail sales data reveals deterioration in
shopping activity in the New Year.
Moreover, the latest Thomson Reuters/University of Michigan
survey of consumer sentiment revealed that 32% of people with
incomes below $75,000 reported a drop in pay.
"There is something going on," said Chris G. Christopher Jr.,
senior principal economist at IHS Global Insight. "The payroll tax
seems to be cutting into things."
You mean taxes are influencing behavior, Mr. Christopher? Say it
In all seriousness, economists estimate the payroll tax increase
could reduce GDP growth by half a percentage point in the first
quarter. And with an economy that's only expected to grow 1% to 2%
in the first half of the year, every half a percentage point
Give Me Lower Taxes… or Take My Passport
On the upper end of the income bracket, higher tax rates keep
prompting well-known individuals to flee their home states and, in
some cases, countries.
France's richest man, Bernard Arnault, head of luxury goods
, applied for a Belgian passport in the wake of his home country
announcing a 75% tax rate on top earners.
The list of other fleeing Frenchies includes Nicolas Sarkozy,
Carla Bruni and Hollywood star, Gerard Depardieu.
In the sports world, Tiger Woods admitted that he fled
California in 1996 because of tax rates. And his competitor, Phil
Mickelson, confessed that he's considering fleeing, too. Why?
Because California voters approved Proposition 30, which raises the
state income tax on top earners to 13.3%. That's the highest in the
Then there's U.S. pop music legend, Tina Turner. She handed over
her U.S. passport to become a citizen of Switzerland. Granted,
she's been living abroad since 1995. But the timing is awfully
Individuals who aren't fleeing are exhibiting tax avoidance
Consider: In New York, fourth-quarter home sales surged 29% to
hit the highest level since 1987. The cause? "Buyers rushed to
finish deals before expected tax increases this year," according to
Even "Mr. Green" himself, Al Gore, couldn't resist the
temptation to pocket more green. Anonymous sources report he
expedited a deal to sell Current TV to Al Jazeera to avoid higher
Companies Hate Taxes, Too
To be fair, individuals aren't the only ones responding to tax
rate changes. Corporations are, too.
Smith & Nephew
) fired roughly 100 employees this month, citing the new medical
device tax that went into effect as part of The Patient
Protection and Affordable Care Act.
- San Diego-based company, Fallbrook Technologies, announced
that it's relocating to Texas.
- Wall Street's elite are packing up shop, too. According to
New York Post
, private equity and hedge funds are relocating to Florida
because of "New York's sky-high city and state tax rates."
Perhaps the broadest example of taxes influencing corporate
behavior involves dividend payments.
You'll recall, back in
, I predicted the threat of higher dividend tax rates would bring
about a special dividend payment bonanza. And it did.
Special dividends last year hit a record $30.4 billion. Some
), even borrowed money to fund the early payouts.
Bottom line: At some point, taxation becomes excessive and
definitely influences behavior. If you don't want to accept the
most recent evidence, pick up a history book and get reacquainted
with the motivations behind the American Revolutionary War.
In fairness, I'd love to conduct a similar analysis on the
impact of spending cuts on behavior. But Washington has been slow
to volunteer for that experiment.
As far as the investment implications of today's myth-busting,
they couldn't be more straightforward.
We need to think twice before investing in any sectors in
jeopardy of unexpected and significant increases in taxes. After
all, the more the government gets, the less that's left over for
investors. And less profits are never good for share prices.