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Broke States Or Stock Selloff: The Capital Gains Tax Dilemma
With just two months until the end of the year, the one most important issue facing the US economy, which incidentally is not how many trillions in new, never to be used (or used only upon the case of hyperinflation) dollar bills Ben Bernanke will issue on November 3, but what the fate of the Bush tax cuts will be, and especially that of capital gains tax, remains still unresolved, Bloomberg has done a good analysis that frames the dilemma for the crippled administration: insolvent states or a market sell off. One would hope that with Geithner's track record vis-a-vis taxes, the former would take precedence, although as Blankfein has been rumored to seek the capital to expand his 15 CPW duplex into a triplex, the final outcome is pretty much clear, and it likely means little if no change to cap gains taxes, and thus no sell off in stocks. The problem is, however, that California, the state with the biggest economy, projects taxpayers’ capital gains will grow 40 percent this year while New York, the third-most-populous state, forecasts a 59 percent increase, or roughly 24% from the current 15%: an event which would have rather dramatic implications on investors desire to close out positions well before January 1. Should these states not be able to recoup revenues from actual capital gains receipts, then a federal bailout is virtually assured.
Bloomberg explains further:
California and New York, after closing budget deficits of more than $27 billion this year, may face $1.3 billion in combined new gaps if the federal capital- gains tax rate doesn’t rise as scheduled, state documents show.
Both count on increased revenue -- $1.1 billion in California and as much as $225 million in New York -- as investors rush to sell assets before the federal capital-gains tax rate goes up to 20 percent, set for Jan. 1. Currently it’s 15 percent.
Nationwide, realized capital gains may jump $122 billion, or 29 percent, to $540 billion this year, according to the Congressional Budget Office. In 2003, Congress temporarily cut the federal tax on profits from assets held at least a year. Last month, lawmakers put off action on whether to extend the expiring lower rate beyond December until after the Nov. 2 elections.
Surging asset sales ahead of the pending increase “could fuel an inflow at the state level,” said Scott Pattison, executive director of the National Association of State Budget Officers. If the rate doesn’t change, then states may not see a jump in related revenue, he said.
We doubt the insolvency of states will cause many sleepless nights to those barons of Wall Street whose net worth is most closely tied to the S&P. Furthermore, California, with its $19 billion deficit is a lost cause: a few billion here or there won't do jack to improve its position. Yet, various states will be quite disappointed and petition the Fed even harder to make up for the shortfall with even more unlimited taxpayer funded bailouts.
Because of weak prices for equities and homes in the past few years, U.S. income from capital gains in 2010 is projected to be 42 percent less than the $924 billion peak of 2007. Stocks, measured by the Russell 3000, are 5.3 percent higher than the average of the past 10 years. Home prices are 5.8 percent lower than the 10-year average.
New York expects $200 million to $225 million in additional revenue from investors accelerating their sales to take advantage of this year’s federal capital-gains rate, according to Erik Kriss, a state Budget Division spokesman. The Division of Budget projects a surge in realized capital gains, to $57.7 billion in 2010 from $36.4 billion in 2009.
Not surprisingly, it's not only California. New York State, where Wall Street is located, reported a material miss to budget "New York’s tax revenue for the past six months trailed forecasts by $529 million, according to an Oct. 19 report by Comptroller Thomas DiNapoli. "
And here is where Keynesianism raises its ugly heads: there is always the possibility that even with new funds, these will be used to support a bloated state-level infrastructure instead of going to filling deficit holes:
“A problem arises when legislators use the additional funds to support spending and ignore the fact that it’s an increase that won’t necessarily last,” said E.J. McMahon, executive director of the Empire Center for New York State Policy. The Albany group advocates for lower state spending.
At the end of the day, none of this will do anything to prevent a domino-like financial collapse of US states.
States are looking at big budget problems all the way into 2012 and probably 2013 as well,” said Nick Johnson, director of the State Fiscal Project at the Center on Budget & Policy Priorities, a research and advocacy group in Washington. As for revenue surges from taxpayers trying to avoid a higher federal-tax rate in January, “any gain they get in fiscal year 2011 will be offset by a loss of revenue in the following year,” he said.
Which is why the administration, which as Neil Barofsky demonstrated earlier is only preoccupied with making Wall Street whole at the expense of 99% of the population, will likely not only not increase capital gains, but in fact lower these, to prevent the widely expected tax-predicated sell off at the end of 2010. Then again, who knows. The level of chaos in the halls of the White House is currently at record levels, as nobody has any clue what on earth they should be doing to prevent the depression from accelerating. Finally, the only thing that does matter, is what Ben Bernanke will decree. After all, he is the only true high priest of the world's biggest economy.
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some states are more equal than others - here there be dragons too
The Banana Republic, with ben and obama the 2 monkeys.
Benana republic.
I'm still too upset about Brock Lesner losing to Cain Velasquez on Saturday to comment on this story. Sorry guys...
bloody mess
Brock didn't have the grappling skills
I think that they will not extend the Capital Gains. The reason is that everyone that sells all of the overvalued stocks will have to pay a huge amount of tax on their positions. This will create a huge sell off in the Market. Plus, the increase in dividend tax will also have those investing in dividend plays heading for the door. They need the tax revenues.
Give with one hand take away with the other.
First out gets the most Money.
The Fed pays capital gains?
What makes you think the dictator and his Politburo would ever stand in the way of the sun setting of the Bush Tax Cuts. We're on our way to 70% marginal rates. Maybe a wealth tax too. Why penalize people for working, when the really rich people already have more money than they know what to do with. Tax their wealth, not their income.
"Why penalize people for working, when the really rich people already have more money than they know what to do with. Tax their wealth, not their income."
Have you come out of your sweet slumber yet? Because they are slaveowners. Working people are their property too you silly boy. What business is it of yours which of their assets they feel like disolving? They own the World and everything in it! How else can one write $600 Tr in obligations against a Wold GDP of $60 Tr? The only way to do that is if you own the World and everything in it or at least act like and believe as if you do.
Tax the rich peoples wealth. They already do in the form of Property Tax. Personal Property Tax if you are a Sub Chapter S Corp or a LLC.
Why does the FED refund the bankrupt banks, but not the States? After all the trillions they printed, 1 billion is peanuts...
Because the goal is 1 state.....not 50. Intermediate goal is 10 corresponding to the 10 FEMA regions.
As usual, I find myself in that lonely corner of the financial world where the long term horizon reaches beyond the next two years. As a result of a few real estate transactions I've made, I've realized enough capital losses to offset my expected future gains for the next three lifetimes. Consequently, I don't give crap what the future cap gains tax rate is.
Make room in that corner. There's a few more of us :-)
until they change the terms of "tax-loss carry-forward." Them puppies can keep a SP100 company going for years.
- Ned
maybe they will give each BK state their own HFT robot and take the spx to 2000 and the dollar to 70
Finally, the only thing that does matter, is what Ben Bernanke will decree. After all, he is the only true high priest of the world's biggest economy.
High Priest? That is blasphemy! It is an undeniable truth the Ben 'let them eat credit' Bernanke is God. Only God can create great wealth from nothing. Only God can cause great suffering and starvation around the world, with click of his mouse.
I'm ready for the next kristallnacht. I hope it's global this time.
Got judefetzen?
and we can sharpen our pitchforks and long knives and do a recreation of "Operation Hummingbird". - Ned
You can try, if you have the guts.
We do. You won't.
FOAD
Yup. Cap gains problem solved for the uber-wealthy as expected and the states are hung out to dry.... then get bailed out with even more funny money. This time heralded as a bailout for Main Street! We are all saved. Party on (if in Cali, pass the bong).
It seems like there's a better way. Why try to base next year's budget off of predictions? I've never understood why this year's tax receipts are not held, tallied at year's end, then used to fund the following year's budget.
Oh, wait. No surprises means no ability to threaten cutting vital services over lack of funds. No getting to say taxes must be raised or else.
Never mind. Personal finance rules don't apply to the government.
No revenue anticipation notes (and fees).
Thay could conceivably make the rate change retroactive to January 1, 2010, as a way to discourage current selling but they don't have the votes nor the balls. But someday. It's like we used to do the the Indians when we screwed them out of their land grants. Prior restraint as its known in the law. Nice and legal you know. Also it would put the Supreme court in a box as if they disavowed prior restraint as a doctrine based on tax cuts then a lot of our prior theft would be up for renegotiation.
You must be talking about the Clinton "tax cuts" - Ned
Tax cuts will be extended. Have you checked pitch fork sales lately?
Good name for an album:
Pitch Fork Futures
Talking about states, I came across these stats:
http://www.thefreeenterprisenation.org/research/oh-mys.aspx
The broke private sector employees (minus Wall Streeters) have to further support the individuals in the public sector.
They will let the cap gains tax expire (with only moderate effect on the stock market). But a bailout for the states isn't going to be coming. Not with the conservatives winning in the next election.
So you're going to see states laying off workers for years to come. No economic rebound will be coming before 2012.
Yup, gridlock in congress == sorry Cali, fend for your 7th largest economy self (you should be able to find some way to carve a $30B shortfall out of a $1.2T SDP, if you think hard enough...perhaps a tax on people named Issa, Harmon, Whitman, or Ellison would suffice?).
I can't wait to see what kind of whistleblowing goes down when all these state govt workers are shown the door.
http://www.youtube.com/watch?v=vsOmvSlPuys
If they don't band aide AMT again in the next 2 months a bunch of folks with high local taxes and a couple of kids are going to find that they owe close to what they paid in in withholding for 2010. Now there is a "stimulus package" !!! Claw hammer to the face on April 15.
can you say Claw Back??
yes, the states will do a claw back on cap gains at NEW rates on OLD gains!!
how many years will they need to go back on to save themselves?? 10? 20?
http://economictimes.indiatimes.com/news/politics/nation/Barack-and-Mich...
And we wonder(some of us), why the Public is INF#@KINFURIATED with this clown?.
Dead dik broke Nation, BOOKS THE ENTIRE TAJ MAHAL, 570 Rooms..........
Not to mention 2 Jumbo Jets, and the Sex-security entourage that will be along.( the 1st Lady) is going to visit a PAY for Pootietang business.........now thats a worthwhile venture.
And esp for a PRESIDENT of the USA's WIFE.( I think I may puke).What that say's about our priorities is beyond me.
Maybe Bill Clinton and she will start a new Bidness once the Destroy America Tour is over.
Only one word describes this exercise in narcissism: disgusting.
Of course, he knows the public is on to him so he might as well party down for the next couple of years. He'll surely want to be out of the country just after the upcoming election disaster for the Dems, too. He pushed them all off a cliff.
Thanks for the post, DZ.
Party like it's 1984!
Not 1st Lady, First Ho.
Not just one hotel. Others too. The press should be all over this, but they are their for the free ride, so why talk. Where are Woodward and Bernstein when we really need them ... oh, probably in India. What is going on now is soooo much worse than 1972!
I thought the "Destroy America Tour" ran from 2001-2008?
The White House itself has said that the economy will not bottom out until 2016. We shall be circling the drain for many years to come.
All of these short term market fluctuations, fraudclosures, and commodity spikes are merely the background noise of the continuing systemic collapse of the bankster fiat empire.
Good riddance.
"The White House" is such an archaic term. Which mouth said that? I heard that we were in a ditch but now out of it with some scratches and keys.
- Ned
Heaven forbid I sound archaic!
The office of vice president Biden reported that prediction to more than 200 staffers of all 50 state governors in a sit-down presentation meeting in D.C. back in August.
Meat is good.
Obama will veto any legislation that allows the uber wealty to profit. He wants a sell off, he wants the elites torn down. He's not a liberal like Clinton. He's a socialist progressive ideologue that will not stop and cannot be reasoned with. He's already said point blank his preference to be a "good" one term guy. He's a fuckin' madman folks.
I'm so sick of the Obama is a Marxist noise. Obama is the best friend the bankers ever had.
He did on Leno for them by saying what they did was legal, what a skyscraper worth of attorneys could never accomplish for them.
Why do you think it has taken 18 months for the lawsuits to start flying over their MBS mess they created and most of the lawsuits are going through state courts, where the King has less influence.
Oh and if you wish to place your bet where the king is going to stand between bankers and states being bankrupted see what I just wrote about his lack of influence legally on many things in said places and figure out what the king will want to do.
Jake .. a Marxist he is in the sense that he has no issue with his uber rich 'friends' but make no mistake, he is for the redistribution of America's wealth to the rest of the world. So you might want to look at him as a 'New Marx Globalist' where the ends (leveling out the world's finances) justifying the means (the demise of America). In his autobiographies, he made it clear that the 'colonial western powers' were a blight on humanity and that the US, although not being a direct colonialist, did nothing to stop the spread of this evil. He is not our friend.
Don't worry, they can't tell the socialists from the crypto-fascists...blinded by cognitive dissonance, you know.
Talk about positive information.
1. Capital gains tax goes up ... stocks sell off dramatically ... QEx issued for extra Trillion
2. Capital gains tax goes down ... states go broke and Fed's bail out, QEx to cover
Either way gold goes up ... there's no upside here for gold bears
Also knowing that taxes will go up, up, up people will want to convert to real gold soon. One may be inclined to cash out IRA's this year to avoid future increases in taxes. Also with inheritance taxes going from 0% in 2010 to 55% in 2011, might this be a little incentive to buy physical gold for storing and distributing to children?
This is exactly why the Alternative Minimum Tax should be repealed.
State taxes are deductible from federal taxes. This only matters to high earners who really can itemize deductions. So why can't a state tax high-earners at fed levels and do a little states-rights revenue-sharing? The AMT. It strips away state deductibility of truly interesting amounts of taxation.
The easiest and most federalist way of "bailing out the states" is to let them bail themselves out by skimming from the fed's trough.
In Wisconsin we're stock piling cheese, beer and sausage in our little beaver damns.