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Triskaidekaphobia1 \tris-ki-dek-a-fo-be-a\ n: Fear of the Number 13

October 19, 2012

The markets are telling us not to worry about the fiscal cliff. Are the markets right, or should investors be more concerned that 13, as in 2013, could be an unlucky number for the U.S. economy?
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Gene Tannuzzo, portfolio manager, Columbia Management


In May of this year, the Congressional Budget Office published a paper outlining the tax increases and spending cuts scheduled to be automatically implemented on January 1, 2013 under current law2. The paper illustrates the real risk of recession if Congress fails to address this looming “fiscal cliff” before year end. Meanwhile, stocks and other risk assets are hovering near their 2012 highs as implied volatility decreased across asset classes. The markets are telling us not to worry about the fiscal cliff. Are the markets right, or should investors be more concerned that 13, as in 2013, could be an unlucky number for the U.S. economy?

What is the Fiscal Cliff?

On the revenue side, there are numerous tax provisions that expire at the end of the year. Most notably, these include the Bush tax cuts (whose expiration will increase marginal tax rates on all income brackets by about 3 %) and preferential tax treatment for dividends and capital gains. The payroll tax cut implemented in 2010 will also expire, increasing tax withholding by 2%. In addition, the alternative minimum tax is scheduled to impact a larger share of workers, at the same time that a new 3.8% tax on investment income kicks in to help pay for Obamacare.

 

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