Taxes in Obamanation
Kategori: Allmänt
Bottom line: For the average wage earner, expiration will raise taxes paid by roughly $2,000 - $3,000 per year. The tax on dividends will go from 15% to the individual’s (couple’s) rate on ordinary income. The tax on capital gains will go from 15% to 20%, plus a 3.8% surcharge for high-income tax payers.. The inheritance tax will go from 35% with a $5 million exemption, to 55% with a $1 million exemption.
Consumers, business owners, and investors all focus on after-tax dollars; after all, it’s the only money you can spend or invest. So the above changes are likely to have the following consequences: Taxpayers will have less money to spend. If you take a look at your current paycheck and subtract 5%, you’ll get some sense of what your paycheck will look like after January 1.
If you recall that the 2009 recession resulted from consumers cutting back on spending (voluntarily) by 5%, you’ll get an appreciation for what may happen when their incomes drop by 5% due to increased taxes Dividends will be worth less than before. Consequently, stocks will be worth less than before. As the Federal Reserve has concentrated on driving interest rates lower over the past three years, retirees and other people with savings have gone further and further afield trying to find useful “incomes.” We were recently told of a search for “creative sources of yield,” which implies that the search continues, but is running short of ideas…usually a very bad sign.
The higher tax rates on capital gains are likely to result in a rush to realize capital gains through the sale of stocks or businesses before 12/31/12. Those not selling before this date, then, are more likely to allow the tax to be deferred by postponing the realization of capital gains (through the sale of assets) in the future. Many small business owners pay company taxes at their rate as individuals. With more money going to taxes, they will have less money to pay in wages. When faced with a higher tax bill and more regulation, a greater number of small business owners will choose to retire earlier than planned. Over the years, we’ve observed that when tax rates exceed 45%-50%, people do strange things with their money to avoid the tax. Remember the tax schemes of the 1970s?
Federal income taxes are not currently scheduled to exceed 45%, but estate taxes are. It will be interesting to see what results. The window for these tax changes to be delayed or further modified is now less than 50 days. This means the decision timeframe for investors to change their actions to adjust for the increased likelihood of higher taxes is closing. (Until November 6, many decision makers waited for the election results, knowing they had 60 days to implement changes after the election.)
Ron Muhlenkamp: Whats is the impact?
We continue to believe the Fed is attempting to fix a fiscal problem (i.e. too much government spending) with monetary policy (i.e. pouring money into the economy). Bernanke, the Fed chief, states “The weak job market should concern every American.” He’s exactly right in this regard, but it’s our belief that hiring will pick up only after the matters of increased taxes, regulation, and healthcare insurance are clarified. (In fact, Bernanke has urged Congress to address such concerns.)
Meanwhile, U.S. Gross Domestic Product (GDP) growth hovers at 1.7 percent. A number of bellwether companies, including FedEx, Intel, and Caterpillar have all revised guidance downwards in the last few weeks. If the automatic tax increases and spending cuts slated for the end of the year occur on schedule, we think it will be a 2%-4% hit to GDP and likely trigger a recession. It is also possible that equity markets, in responding to the latest round of QE, have gotten too far ahead of the economy. If the economy doesn’t follow, we expect the markets to correct.
Meanwhile, U.S. Gross Domestic Product (GDP) growth hovers at 1.7 percent. A number of bellwether companies, including FedEx, Intel, and Caterpillar have all revised guidance downwards in the last few weeks. If the automatic tax increases and spending cuts slated for the end of the year occur on schedule, we think it will be a 2%-4% hit to GDP and likely trigger a recession. It is also possible that equity markets, in responding to the latest round of QE, have gotten too far ahead of the economy. If the economy doesn’t follow, we expect the markets to correct.
