Why a Tax Hike on the Top 2% Will Hurt Us All

The fiscal cliff continues to loom ever nearer while the powers-that-be battle over the best way to save us. Scratch that. They’re not interested in finding the best way to save us. They’re only interested in finding a solution that will keep them in power.

Be that as it may, Obama’s current “solution” is to raise tax rates on the top 2%… i.e. the millionaires among us with incomes of $250,000-plus. And most polls show the great majority of people approve of such tax hikes on the rich.

Those that don’t approve – a.k.a. the Republicans in power – argue that such a tax hike would hit the small businesses that create the most jobs.

Well… maybe. As an entrepreneur myself, a minor shift in capital gains tax and marginal tax rates will leave a mark on my bottom line, but not enough to send me screaming for the hills.

That’s not the real problem here…

The real problem is this: a minor tax rate increase on the top 1%, 2% or even top 10% would impact spending and economic growth beyond business investment and job creation.

That’s because the top 1% controls nearly 50% of the wealth out there and at least 20% of the income. The top 2% controls more than 70% of all the wealth and 30% of income (although they tend to save and invest more so they account for more like 25% of the spending).

If there is a 5%-of-income increase in taxes on this group, and that is probably conservative here, they’ll spend less. If they spend less at a rate of only 60% of those higher taxes, that translates down the line to about 50% of GDP.


That is significant in an economy that has only averaged 2% growth since the great recession… growth only achieved through the Fed putting it on life support with endless stimulus(and don’t even get me started on that B.S… another day, another article).

It becomes even more important in light of our demographic analysis that shows the most affluent households peak five years after the average household does.

The average household hit its peak spending at age 46, back in 2007. The top 10% will hit that peak in the months ahead. So raising taxes on the most affluent will only compound the slowing spending by a sector that has held up our economy since the great recession.

To make matters worse, if a slowdown from rising taxes and spending cuts shifts the economy down and stocks start to fall, then the most affluent households (who control almost all of the financial assets outside of personal homes) will feel even less affluent and cut back even more.

That’s how a struggling economy moves back into a double-dip recession!

Our research shows that taxes must rise after major debt and asset bubbles. It was necessary back in the 1930s. It’s necessary now. And it will take both tax increases and budget cuts to balance our unprecedented debt and deficits. It will also take a major restructuring of private debt, which is three times the magnitude of governrnment debt, before we can get more efficient and move into the next boom.

All of this is inevitable.

As an investor or business owner, you need to get ready for the next economic slowdown. Protect yourself, especially between early 2013 and early 2015 by moving into safe and counter-trend investments and making your business leaner and meaner.


P.S. If you’re wondering how bad the next economic slowdown will be, think Dow 6,000 within a year or two… think Dow 3,300 within the decade. This isn’t just going to be a slowdown. The gold price is going to collapse. Real estate is in for another severe downturnrn. And what you need to survive and prosper through it all is this.



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Harry Dent

Bestselling author and founder of Dent Research, an affiliate of Charles Street Research. Dent developed a radical new approach to forecasting the economy; one that revolved around demographics and innovation cycles.