Liberally Conservative

"Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children's children what it was once like in the United States where men were free....... ~Ronald Reagan~

Wednesday, August 11, 2004

Kerry Presidency.....Stock Market Tanks

Candidates always claim that their policies will improve economic outcomes if they are elected and the Kerry campaign is no different. Financial market developments have advanced enough that we can now evaluate what the markets think about a candidates promises. If equity markets had a vote, it seems they would cast it for President Bush. It has become apparent that the economy would have been weaker and the stock market lower absent President Bush's tax cuts. Research has shown that the tax cuts have provided significant support to consumer spending since 2002, and business investment spending recovered strongly after the dividend and capital gains tax cuts in 2003 lowered the after-tax cost of investing. The dividend and capital gains tax cuts, along with the improving economy, also helped boost the value of the stock market. By increasing the after-tax value of a dividend paid or a capital gain realized, the tax reduction increased the demand for equities, and pushed up prices. The S&P 500 index of stocks rose about 26% last year, and although other political and economic factors helped, the tax cuts contributed to a significant portion of this increase. Indeed, the market rallied by about one-and-a-half percentage points on the day that the House passed the 2003 tax reduction package. Despite this record, Sen. Kerry has promised to repeal a significant portion of these tax cuts if elected, including the tax rate reductions on dividend and capital gain income. With the growth rate of the economy high but slowing somewhat, there are signs that this promise is rattling financial markets. The evidence suggests that when Sen. Kerry's political fortunes rise, the stock market tanks.

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