Congress Can Now Get to Clarifying Tax Policy

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BOSTON (TheStreet) -- A popular point of punditry we've heard throughout the lead-up to Tuesday's midterm Congressional elections was that Wall Street loves gridlock.

More appropriate might be to clarify that financial markets appreciate the stasis a logjam affords. Conflict isn't the desirable environment, so much as the stability and predictability that comes from political paralysis.

Because Republicans snatched back the House, but not the Senate, the White House and all three branches will be increasingly handcuffed to each other, meaning two more years of conflict, offset perhaps only by some low-hanging fruit accomplishments that can satisfy whatever semblance of bi-partisanship may still exist.

Among that fruit may be long overdue clarifications on tax policy, a long-lingering bugaboo that was intentionally punted beyond last night's elections.

To start with are the so-called Bush tax cuts and the prospect that tax rates will rise for most of the country on Dec. 31.

Behind the scenes there is no shortage of Democrats, despite the constant din of "they help the rich, not the economy" rhetoric, who support at least some extension of the cuts. Now that the election has passed and play-nice party unity will probably take a back seat to broader compromise, expect to see action on these cuts sooner, rather than later, perhaps even as part of the upcoming lame duck session.

President Obama may be standing pat with his pledge to allow the 10-year-old tax cuts to again rise for those making over $250,000 a year, but his resolve will surely be tested by newly emboldened Republicans. At the very least rates could be "decoupled" so that middle-class workers get a long-range extension and higher earners also earn a reprieve for at least a year or two.

A report ahead of the election by Wells Fargo Securities for the boating industry makes the case that an extension of the Bush tax cuts will have an impact on "discretionary spending" especially "large-ticket discretionary purchases" by consumers making more than $250,000 a year.

"The magnitude of Republican control of the House and gains in the Senate could also precipitate a more reasonable tax and regulatory environment," the report adds. "Providing clarity on 'rules of engagement' for business should allow companies greater confidence to make investment decisions (such as hiring, capital). Specifically, lower taxes on U.S. corporations and repatriated foreign profits should create greater investment/hiring in the United States."

The Estate Tax, zeroed out and ignored all year, will certainly be revisited and resurrected in the coming term, but the clock is ticking. Barring quick action, a rate of 55% with a $1 million exemption will be back on the books.

Many Republicans will surely try to kill it as a "double tax," but it is more realistic that we will see a lessening of the rate and, at the very least, an increase to the current threshold.

A more reasonable formula could go a long way to ease the capital fears of growing small businesses and family farms.

Congress will also still have to act on potential increases to capital gains and dividend taxes, other particularly onerous concepts for investors and corporations that enter the playing field as the Bush tax cuts expire. The dividend tax rate could shoot to 39.6% from 15% for those in the top tax bracket. The capital gains tax would rise to 20% from 15%.

Empowered Republicans and smacked-down Democrats alike are probably not going to test out the impact of these increases on a still-recovering marketplace.

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