I know that if no agreement is reached, the lower long-term capital gains tax rates go away -- but the only long-term capital that I am considering selling actually will be a loss, and one large enough that it will provide me $3000 losses every year for a long ways into the future. I am increasingly unsure whether going off the cliff will be a good thing or a bad thing for the stock market. It will likely be bad for the economy as a whole, but even that, I am not entirely sure about.
To the extent that it forces increased tax revenues and reduced spending, it will reduce future deficits. This is good for the economy long-term.
To the extent that it creates uncertainty, it will discourage business investment, perhaps bringing down stock prices and certainly doing short-term damage to the economy.
To the extent that the collapsing economy brings down interest rates (and yes, during the Depression people actually bought negative yield corporate bonds), it might cause an increase in purchases of dividend-paying stocks. On the downside, expiration of the Bush tax cuts means dividends are again subject to regular income tax rates.
I am really in something of a quandry about whether to sell a couple of mutual funds that I have held since the 1990s and which, for reasons that I do not understand, are worth a good bit more than I paid for them, but still are considered to be capital losses if I sell them now. Is it possible that going off the cliff could cause stock market increase?
Please: comment on what you think the results will be of the children failing to play nice together in Washington.