Tags: El-Erian | tax | Obama | win

Pimco’s El-Erian: Obama Will Hike Taxes on Rich, GOP Will Concur

Wednesday, 14 Nov 2012 01:39 PM

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President Barack Obama will hike taxes on wealthy Americans as part of a deal to steer the economy away from the fast-approaching fiscal cliff, and GOP lawmakers will reluctantly give their blessings, predicts Mohamed El-Erian, CEO of Pimco, manager of the world’s largest bond fund.

At the end of this year, the Bush-era tax cuts and other benefits are scheduled to expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the economy sliding into a recession next year if left unchecked by Congress.

When it comes to the tax cuts, Obama has said he wants tax breaks to expire for wealthy Americans to drum up revenue that could help narrow deficits.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

Republicans have said such a move would hit many small business owners with higher tax bills and prompt them to put off expanding and hiring new workers, which the economy needs.

Obama will win in this area, El-Erian said.

The rich saw their wealth increase by leaps and bounds during the boom times over the last decade, though their losses were curtailed more than others via bailouts and Federal Reserve stimulus measures.

“While most Republicans will acknowledge all this, they will argue that taxing the rich is bad for all — principally because it reduces incentives for entrepreneurship, risk taking and economic expansion,” El-Erian wrote in a Fortune Op-Ed.

However, going over the fiscal cliff will do more damage to the economy than will allowing taxes to rise for a privileged few, and Republicans know that.

“President Obama will — and should — insist on increasing taxes on the highest earning brackets. The Republicans will shout and scream but end up going along. An economic debacle will thus be avoided,” El-Erian wrote.

“America will breathe a collective sigh of relief. But it will be dampened by the realization that this is only a small battle in America’s multiyear war to restore economic dynamism, ensure financial soundness and overcome political dysfunction,” El-Erian added.

“And here the need for constructive interactions between Democrats and Republicans is even more demanding, yet just as urgent and important.”

Even with the fiscal cliff still a month away, the effects can already be felt.

Businesses, smaller outfits especially, don’t know what they are going to be paying in taxes next year and are putting off investing in new projects and hiring for now.

Meanwhile investors are holding off from jumping into the stock market, as tax hikes due to take effect could raise rates on investment income next year, namely dividend income and capital gains.

Some high-level market participants have said even a compromise that avoids disaster could still weigh on the economy next year.

“Whether or not it gets resolved — which I believe it will — we’re going to have uncertain moments and insecurity between now and then, which will roil the markets,” Goldman Sachs CEO Lloyd Blankfein said at a conference, according to Bloomberg.

“My best guess — it might not turn out this way — but we are at least braced for a ride here.”

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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