Deutsche Bank analyst Peter Hooper says unless Congress extends the Bush-era tax cuts, the economic recovery is dead.
"If a political stalemate in Washington results in no extension, fiscal drag could reach 2.5 percent of GDP next year, enough to bring a sluggish recovery to the stalling point," Hooper writes in a note to investors, the Business Insider reports.
"If the Administration's tax extension package is passed, the drag in 2011 will fall to a bit less than 1.5 percent, and if the Republican across-the-board extension passes, it will fall to around 1 percent."
"Either way, we think that pent-up private demand would be sufficient to keep a moderate recovery going."
The cuts, enacted by President George W. Bush in 2001 and 2003, will be revoked next year for all income brackets if Congress does nothing.
President Barack Obama wants Congress to keep the reductions in place only for those with income of less than $200,000 a year. Obama's proposal would boost the top tax rate to 39.6 percent next year from 35 percent currently.
The Wall Street Journal reports that an analysis by Barclays Capital suggests equity markets could take a significant hit if the full tax increases for high earners go forward, reducing the S&P index by as much as 100 points.
The newspaper notes that the stock market’s return from its recession lows has been a driver of economic growth.
“The point we’re trying to make is that a big chunk of market cap is vulnerable to tax policy changes. Food for thought in the current political landscape,” the authors of the analysis conclude.
To make its calculations, Barclays looked at the historical relationship between investment taxes and equity valuations in recent decades, then figured out the likely impact from the current set of planned tax increases.
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