Questions

Wall Street analysts are warning about the negative impact of the federal tax time bomb on stocks. Their advice: Sell your equities now and pay lower taxes on stock gains than Uncle Sam will charge in 2013 if President Obama is re-elected.

Under Mr. Obama's plan, which takes effect automatically unless the tax hike is called off, the capital gains tax rate rises to 23.8% from 15%; and small-business profits are taxed at just over 40%, up from 35% now. Selling stocks immediately or pulling profits out of a firm before 2013 can make good business sense, advisers are urging clients.

Another reason to sell now, some economists argue, is that the stock market could tumble if investors become convinced that Mr. Obama will win the election. One of the top analysts on Wall Street, David Malpass, told his clients this week: "The year-end tax increase, which [the Congressional Budget Office] now projects will cost the private sector $5.2 trillion over ten years, is scheduled to hit not only income but also capital through the big tax increases on capital gains and dividends. Increases in the taxation of capital cause a direct and immediate reduction in asset prices, which we think will fall materially if the probability of the tax increase rises."

James Pethokoukis of the American Enterprise Institute notes that the Obama tax increase for 2013 would take 3.5 percent from GDP next year, which is twice as high as any tax increase in nearly a half-century. The previous high was LBJ's Vietnam War surtax, which cost the economy 1.7 percent of GDP. He calls this the "fiscal drag" effect of Mr. Obama's spending policies. Even the CBO report issued this week predicts that taxes as a share of GDP will rise to 18.4% from 15.7% of GDP.

Reagan economist Arthur Laffer says the effect of the 2013 tax increase will be to cause "an acceleration of economic activity at the end of this year ahead of the higher tax rates, then a big decline in output in 2013. It's going to be very bad." This kind of behavior—accelerated bonuses, for example—is what happened in 1993 before Bill Clinton's tax hikes.

Many investors don't believe the tax time bomb will ever detonate no matter who wins the election, and they may be right. Mr. Obama extended all Bush tax cuts after the 2010 elections. Even CBO is warning of a recession if Washington jumps. But in a statement to reporters earlier this week, White House press spokesman Jay Carney showed no signs of a backing down and reiterated Mr. Obama's commitment to raising tax rates next year on "the top 2 percent."