Larry about the proposed tax hikes.

Before I get to my analysis of the key markets, today I want to digress a bit and discuss what I call the “idiocy of raising taxes.”

Especially taxes on dividends. It offers a great example of how raising taxes can backfire, and how Washington’s bureaucrats don’t have a clue about what they’re doing.

Consider the various economic gurus who say raising taxes on dividends and capital gains won’t impact investor behavior or the economy. That’s pure hogwash.

To see why, just consider the companies that are busy cashing out their investments ahead of a tax hike January 1 ...

Costco (COST), the giant wholesaler, announced Wednesday that it will pay a special dividend of $7 a share — or $3 billion in total cash — before the end of the year. As a result, Costco shareholders will only pay the current 15% tax on dividends, rather than the 39.6% rate scheduled to kick in next year.

That represents a tax savings of $738 million for Costco shareholders, 24.6% less taxes they have to pay on the $3 billion payout.

Or put another way, it’s $738 million the U.S. Treasury will NOT get.

Costco isn’t the only company cashing out before year-end. According to the Wall Street Journal, as of last Wednesday, 173 companies had announced special dividends, compared to only 72 in the same period a year ago.


In the Russell 3000 Stock Index, from just September to mid-November, 59 companies declared one-time special dividends, four times last year’s pace.

Howard Silverblatt of S&P Dow Jones Indices stated, “I find no precedent like this at all going all the way back to the 1950s.”

Wal-Mart (WMT) did the same thing last week, moving up its expected $1.34 billion dividend payout next year to this year. That’s another $319 million the Treasury won’t get.

And mind you, the figures above don’t even include the 3.8% ObamaCare surcharge that households making more than $250,000 next year will save by getting their dividends this year.

You can bet that many more companies will be doing the same in the days and weeks ahead, accelerating next year’s dividend payouts to this year.

And it’s all money the U.S. Treasury will NOT get as a result.

Moreover, the long-term consequences of a higher dividend tax starting in January will be that fewer and fewer companies will pay dividends at all, while others will reduce their payouts.

Which again, all translates into less money for the U.S. Treasury, precisely the opposite of what it wants.

Consider history. According to the Wall Street Journal, dividend payouts rose only modestly in the 1980s and 1990s when they were taxed as ordinary income.

But when the Bush tax cut chopped the rate to 15% on January 1, 2003, dividends reported on tax returns nearly doubled to $196 billion in 2003 from $103 billion in 2002.

By 2006, reported dividend income hit $337 billion — more than three times the pre-tax-cut level.

In other words, when tax rates were cut, the Treasury received more tax income. If they are raised, the Treasury will get LESS tax receipts.

You don’t need to be a rocket scientist to figure it out. Raising taxes, in any form in my opinion, is pure idiocy.

When the capital gains rate last rose, to 28% from 20% as part of the 1986 tax reform, investors also cashed in before the higher rate took effect.

Tax revenue from capital gains in 1986 soared to $52.9 billion, then plunged to $33.7 billion in 1987 and stayed largely flat for nearly a decade. It boomed again after Bill Clinton and Newt Gingrich agreed to return the rate to 20% in 1997.

Again, it’s a simple formula: When government raises taxes on dividends and capital gains, it lowers the after-tax return on stocks.

That in turn reduces the wealth in the private economy. And not just among the rich. It will affect almost everyone.

It’s also why I remain largely bearish most markets in the short- to intermediate-term.

The Dow is hovering below important resistance at the 13,400 level, and looking like it’s about to break down. Ditto for the S&P 500.

Gold is starting to weaken again, unable to take out resistance at the $1,755 to $1,760 level. A break of the $1,700 level should lead to new lows.

Oil is having trouble at the $90 level. Look for it to top out soon and head back down.

Silver is going to hit a stiff wall of resistance at the $34 to $35 level and a plunge down to $26 — and lower — is still in the cards.

Bottom line: Don’t be surprised when you see Washington’s tax receipts plummet next year and the deficit widen and the national debt get worse. The idiots in Washington, again, just simply do not have a clue what they are doing.

ALL of this virtually guarantees that 2013 will be the wildest ride any of us has ever seen.