Taxmegeddon and the Fiscal Cliff: The Reason Why the Stock Market Crashed on Wednesday


November 6 was a monumental night for a myriad of reasons: the legalization of marijuana in Colorado and Washington; the affirmation of gay marriage in Maine, Maryland, and Washington; as well as the election of the first openly LGBT member of the Senate (Tammy Baldwin). Despite that, fewer than 24 hours after the results came in, the stock market fell by more than 300 points and Republicans across the country blame the reelection of Obama as the reason why the stock market fell so much. 

Objectively, more than 57 million people are unhappy that Obama was re-elected, and as a result of that, will point anything out which shows the possible ineptitude of Obama. Two facts in this situation are that Obama remained president and that the stock market fell 312 points. 

Celebration over Obama’s victory turned to panic selling in less than 12 hours as all three major American equity indexes dropped over 2% by noon. The broad based S&P 500 dropped below the 1,400 level mark for the first time since September 4.

Some are arguing that the stock market fell because of Obama. Whatthese commentators are overlooking is the pressing economic issue that has been moved off the front page by all of the election coverage, a major event that is due to come into effect on January 1at midnight. Even if Romney had won, his presidency would not have begun until January 20, 2013, three weeks after the expiration of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in addition to the automatic spending cuts under the Budget Control Act of 2011.

If those automatic spending cuts are enacted, in addition to the expiration of said act, the consequences would be dire without any sort of stopgap measures being put in place. Without going into every detail of the tax codes, this would cause the Bush tax cuts to expire, taking tax rates back to the Clinton administration-era. This would also cause the extension of federal unemployment benefits expire, as well as effectively increase the payroll tax 2%. 

While those affect everyone, there are pieces of this that would only affect the wealthiest citizens, such as the increase in the estate tax from 35% to 55%. Another provision that helps only the more well off citizens is the increase in dividend and capital gains taxes.

Many liberals would like to see the wealthiest citizens in America pay a higher tax rate, they unanimously agree that it would be detrimental to society to place a higher burden on the middle and lower classes. While major governmental programs such as Social Security, and veterans’ benefits would be exempted from the spending cuts outlined in the Budget Control Act of 2011, other programs such as Medicare, and national defense funding could be reduced in certain cases quite substantially.

So, what does this mean for the American public? It means that a very pressing situation, which has existed ever since its inception, is coming to light now that the election frenzy is over. If no steps are taken and these tax increases and spending cuts are enacted, the country could slip back into a recessionary period; however, the deficit would be sharply decreased. On the other hand, if these spending cuts and tax increases are extended, the deficit would continue to increase.

The most likely course of action undertaken by lawmakers will be that certain spending cuts are enacted and others will not, while certain tax breaks will be continued. These measures will once again be taken on a short-term basis until the pressure against the clock is not as pressing and the idea that the country could slip directly back into a recession is averted.

In closing, the reelection of Obama did not affect the precipitous drop in the stock market today, but rather, the realization that in fewer than two months, if nothing is done with the extension or alteration of the current laws, the United States could be staring at a regression to late-2008.