Can election outcomes be shown to have a predictable effect on the market?
2008 is shaping up to be a volatile election cycle in the United States. Between the Iraq War and the renewal of Bush tax breaks, the election results could have a huge impact on the economy.
Many financial analysts believe that a gridlock situation, where no single party controls the legislative and executive branch, is “good” for the economy as either party needs to negotiate with the other in order to move legislative ideas forward.
With the possibility of single-party rule after 2008, CreditSights takes a detailed look at what that might mean for the economy in their report entitled “Election 2008 - Why Markets Care (And Why They Don’t)”.
Among the items on the legislative agenda, Bush tax cuts would have one of the most influential effects on the markets. 2008 will be critically important with regard to the tax cuts, because it is the last election before a decision must be made on whether or not to extend them.
Various items are up for consideration including the reversion back to the personal income tax rules of pre-2001 levels.
According to CreditSights, a return to pre-2001 income tax rates would “generate an additional $167 billion in revenues in 2012.”
Other sources of revenue include the re-introduction of the estate tax and reverting back to the pre-2003 dividend tax, taxing at the recipient’s marginal income tax rate.
A major concern for the financial markets is whether or not the capital gains tax increases.
A higher capital gains tax could potentially have a “negative impact on equities and on investment in proprietorships and partnerships.”
An additional variable thrown into the mix is the Iraq War. CreditSights examines whether or not the tax cuts should be renewed based on the current fiscal policy and the huge savings that will be generated as the operations in Iraq and Afghanistan eventually come to a close.
The full CreditSights report is available for purchase here.
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