"No one got relief except the pork-receiving, politically connected special interests," grouses David Kotok, chief economist at Vineland-based Cumberland Advisors. He's put out because his income tax and investment tax rates are going up, but "moviemakers and auto racers," not to mention energy investors and shore homebuyers, still get their tax breaks.
Indeed, Congress managed to make taxes still more "complex" by adding new guidance for calculating taxable income in the deal legislation, noted Lisa Whitcomb, a director at Glenmede Trust in Philadelphia.
Congress did set new tax rates, reducing that uncertainty. Otherwise, members decided to give themselves a two-month breather, so budget-balancers can prepare to renew the bigger fight on whether to cut popular tax breaks for businesses and homeowners, force cuts to Social Security and Medicare for the old, and Medicaid for the poor, trim military programs (including some President Obama says Congress wants but the Pentagon doesn't), or threaten to stop payment on the federal debt, as conservatives did in the summer of 2011.
The renewed debate "will likely weigh on business and consumer confidence" and financial markets, warns John E. Silvia, chief economist at Wells Fargo Securities L.L.C.
Good and bad
There's a good news-bad news quality to the compromise signed last week.
"[Income] tax rates were permanently lowered for the vast majority of Americans," noted Guy LeBas, chief bond strategist at Janney Capital Markets in Philadelphia. Yet, at the same time, "most Americans will face a higher tax bill in 2013," because the Social Security payroll tax is back up, LeBas said.
The higher Social Security payroll deduction hurts workers and retailers: We have less to spend. But it's good for future retirees, if it slows the speed at which Social Security is burning its surplus.
For investors, "The threat of default is much worse than the threat of high taxes," warns James Mayer of Tower Bridge Advisors, West Conshohocken. Except that maybe investors have learned "all the impact of political nonsense should be quickly reversed after the problems are resolved," he added.
Capital gains taxes are back up to 20 percent, from 15 percent, plus a 3.8 percent investment profits tax, for people who make more than $400,000 a year. That's bad, if you've got a lot invested. But it's still good, if you make most of your money from investments: Dividend and capital gains taxes are now just half the top rate for income taxes.
Indeed, with federal tax policy favoring investment over labor, Mayer expects U.S. companies will soon be paying up to half their profits back to investors as dividends.
Sounds like reason to buy stocks, if you can still afford them. But don't expect values to rise, too, Mayer warns: "Matching last year's gains will require a much stronger economic outlook later this year than is visible at the moment."
Contact Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD on Twitter.
