Over the course of the last month and a half I have written a few posts citing the lack of confidence as a key element in the market's current weakness. To be sure, there are fundamental factors that need to be addressed to get the economy on firmer footing as well. Some of those factors:
- reduction in consumer and government debt levels
- unwinding of derivatives exposure
- stopping the bailout of every company
One major issue that is pulling down confidence is the overhang of the potential new tax policies that will be coming out of Washington under the new Obama administration. Raising taxes in an environment of economic weakness historically has not proved a positive for an economy that is in recession.
- Obama's desire to uncap the payroll tax has very negative implications for businesses and individuals.
- Eliminating the deductibility of 401(k) contributions reduces the incentive to save. It is saving, and not spending, that more individuals need to make more of a habit.
- Increasing benefit costs related to health care provided by employers. This policy does not promote hiring.
In times of economic weakness, raising taxes and instituting policies that discourage employers from hiring will not stimulate economic growth. President-Elect Obama and his advisers would be wise to make a statement that they will not raise taxes in any form on individuals and business during economic times like we are in currently.
Washington Needs To Trim The Fat
Income Tax Uncertainty Weighing On Market
Wall Street Journal article, Targeting Your 401(k)