What are the odds of an Obama compromise on Bush rates?

November 12th, 2010 by Joe Kristan

Tax planners got all excited yesterday when top White House aide David Axelrod hinted to the Huffington Post website that the President might be ready to extend the 2010 tax rates for top earners. Absent new legislation, the top marginal rate will rise from 35% to 39.6% in 2011 — and higher when phase-outs are counted.
But if the Axelrod statements are a trial balloon, the President isn’t ready to climb aboard just yet. CNN reports on comments he made in Seoul:

“That is the wrong interpretation because I haven’t had a conversation with Democratic and Republican leaders,” Obama said of a Huffington Post article suggesting that in advance of negotiations with lawmakers next week, the White House has calculated that giving in on tax cuts for the rich is the only way to get the middle class cuts extended too.
“Here’s the right interpretation — I want to make sure that taxes don’t go up for middle class families starting on January 1st,” Obama said at a news conference at the conclusion of the G-20 Summit here. “That is my number one priority for those families and for our economy. I also believe that it would be fiscally irresponsible for us to permanently extend the high income tax cuts.”

So what will happen? In sports, the betting lines do a good job of forecasting game results. So lets see what the Intrade lines are on rates.
Intrade, the online prediction market, has prediction markets for 2011 tax rates. The technical details are not entirely clear — I’m not sure whether phaseouts of itemized deductions count, but I don’t think so. Given that, two Intrade submarkets are of special interest:
– One that forecasts a top 2011 rate in excess of 38%, and
– One that forecasts a top 2011 rate in excess of 36%.
Here are the prices as of this morning:
The >38% market currently shows a bid price of 40 and an ask price of 55. If the rates are in excess of 38%, the market will close at 100; if not, they will close out at zero. That means the market is about evenly split at the last trade between those who think the top rates will go into effect as enacted and those who don’t. The market price fell sharply immediately after the election, indicating that speculators feel the new Congress changes things:
The >36% market is more interesting. It is trading at over 85, which means the traders think that an increase over the current 35% top rate is almost certain. This would seem to indicate that the markets predict that the top rates will go up, but not all the way to 39.6%. How does this square with a choice between extending current top rates and letting them expire? Perhaps it implies some “millionaire tax” on very high incomes. Or, perhaps, it’s an anomaly in a lightly-traded market. If you think the odds are good that the Bush-era rates will be temporarily extended, this market may offer a speculative opportunity.
Of course, the markets are always subject to change. For your convenience, here are live embedded charts for your convenience whenever you read this post:
>38% Market:

Chart by Intrade
>36% Market:

Chart by Intrade
In real life, the best thing to do is stay flexible so you can best shift income and deductions between 2010 and 2011, depending on what Congress does in the next few weeks.
Thanks to Going Concern for the CNN link


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