Smashed Records, Dead Theories: In First Quarter, Top Tax Rate Went Up And Markets Soared
Concluding the first quarter of 2013, we still await the portents of doom that preoccupied the right as the year began three months ago. Ending the Bush tax cuts for the wealthiest Americans – which President Obama insisted must be part of the “fiscal cliff” deal – would be ruinous to the economy, said his Republican critics. Unless we extended those tax breaks again, growth would be stifled and the consequences would be dire.
So far, so wrong, at least so far as the markets indicate: During the first three months of this year, stock indices have broken records that have remained intact since 2007. In fact, this quarter is the single best recorded by the Dow Jones index since 1998, with an increase of more than 11 percent. Standard & Poor’s went up by 10 percent and NASDAQ increased by 8 percent.
While March was a very good month for the markets, the largest improvements came last January – almost immediately after the Bush tax cuts expired for the highest income bracket, rising to 39.6 percent. It was the first significant tax hike on the rich in the United States since 1993, when President Bill Clinton signed the Omnibus Budget Reconciliation Act – which was billed by Republicans at the time as the largest tax increase in American history and an economic policy disaster that would lead to recession.
Instead, as everyone now remembers wistfully, the economy boomed along with the markets.
Two decades later, raising taxes on roughly one million of the richest households, with incomes over $400,000, seems not to have damaged the economy at all so far – if the reaction of the markets provides any measure.
While it is true that employment still lags, growth is steadily improving. The Organization for Economic Cooperation and Development predicts that U.S. gross domestic product (GDP) will increase by 3.5 percent in the first quarter of 2013 and continue to grow at a slower rate during the following quarter. According to the OECD, which gathers data in all of the developed nations, the U.S. economy will continue to outpace those of the other G-7 countries this year.
Although overall growth remains severely imbalanced – with corporate profits soaring while workers’ share declines, middle-class incomes stagnate, and good jobs remains scarce – the nation’s general economic improvement undermines the sour outlook on the right. Clinton proved that raising taxes on the wealthy would not sink the economy, as his adversaries insisted – and to date, Obama seems poised to prove the same point once more.