When I was in 2nd grade I developed a bad habit of tipping back in my chair. My goal was to get just to the point where I might fall over and then bring my chair back down to safety. My teacher Mrs. Coursey didn’t like this because I was causing a distraction to the other students as well as putting myself in harm’s way. Each time she caught me tipping she would have me write “I will not tip back in my chair” 50 times on a sheet of paper, a-la Bart Simpson.
It wasn’t long before I figured a way around this – I prepared advanced copies of “I will not tip back in my chair,” pages and pages, front and back, that I kept in my desk in the event of being caught tipping. The next time Mrs. Coursey saw me tipping in my chair, I had a sheet with 50 iterations at the ready. I got around the system on a technicality. Now, this was clearly not the point Mrs. Coursey was trying to make, but I was 7 years old and defiant.
For some reason this story comes to mind when I think about our country’s current state of political affairs. Perhaps there is a way of getting around the system on a technicality. Below are some facts:
1. Grover Norquist (President and Founder of Americans for Tax Reform) has most Republicans in the House by the short hairs. Norquist is in the news a lot these days for the pledge he’s made the majority of our Republican leaders sign. The pledge states that they agree to never, ever vote for any income tax increase. Ever. If the opportunity to vote against a tax increase should arise twice on Sunday, anyone who has signed the pledge is obliged.
2. On January 1, 2013 the Bush-era tax cuts are scheduled to expire – this means the top-tier income tax rate will return to 39.6% (from the current 35%) for the highest wage earners. By my calculations this would be considered an increase in taxes, albeit not one that was actively voted for.
3. President Obama has said that no deal to resolve the “fiscal cliff” will be signed off on without an increase in tax rates for the top 2%, something to which Republican Speaker of the House John Boehner strenuously objects.
A Likely Outcome?
At the end of this month the Bush-era tax cuts expire (and the top-tier rate will return to 39.6%), sending us over the aforementioned cliff. At that point the Norquist-loyal Republicans could vote on a [slight] tax cut – say, from 39.6% to 38%, keeping Grover happy. Tax rates would end up higher than they are today on the top 2% but a tax increase would have never been voted for.
In this scenario President Obama is happy because we are adding additional revenue from top earners; Boehner’s happy because he didn’t concede to anybody about anything; and I’m happy because we won’t have to hear the term “fiscal cliff” again for the foreseeable future.
This could be the technicality investors have been looking for
Now, what happens to the stock market in the interim? I imagine we get tossed around a little until something similar to the outcome above gets unveiled. Just a few weeks ago the general consensus was that a “deal would get done” prior to December 31st. Today it is looking a little more dubious that things get totally resolved before 2013 begins, but even this isn’t the end of the world.
While we have no idea when a deal will be agreed upon, we see progress being made and a mutual desire to get to the destination in a timely fashion. In other words, we anticipate some minor turbulence, but not so much that we have to turn the plane around.
Enjoy the rest of your week!
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
310.772.2201 – Main
310.496.2822 – Fax