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Taxes Cometh Again, gosh this should help fix a sick economy............

catch22catch22
edited February 2012 in Fund Discussions
my own note about the below Perhaps 2013 will be another very good year of the "muni bond".

David Rosenberg On Taxation-Shock-Syndrome
Submitted by Tyler Durden on 02/21/2012 22:07 -050


While nothing is more certain than death and taxes (and central bank largesse), David Rosenberg of Gluskin Sheff uncovers The Unlucky Seven major tax-related uncertainties facing households and businesses that will likely lead to multiple compression in markets (rather than the much-heralded multiple expansion 'story' which appears to have topped the talking-head charts - just above 'money on the sidelines' and 'wall of worry', as 'earnings-driven' arguments are failing on the back of this quarter). As he notes the radically changed taxation climate in 2013 and beyond will have an impact on all economic participants as they will probably opt to bolster their cash reserves in the second half of the year in preparation for the proverbial rainy day.



First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term capital gains rises to 20%.

Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners.

Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250.000 for joint filers).

Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases). The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).

Forty-one separate tax provisions expire this year — see page 32 of the Economist. Of course, there is always the chance that after the November 6th election, a Congress that can never seem to allow anything temporary to meet its expiry date will pass an extension — for more on all this, see More Uncertainty for 2013 on page B9 of the Weekend WSJ.

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Comments

  • msf
    edited February 2012
    1. For any tax changes to have an impact on the demand for muni bonds, the change would have to decrease the after tax return of taxable bonds to below that of muni bonds (adjusted for the additional risk). Traditionally, munis yield about 85% of treasuries (10 year maturities). The current spread (for 10 years) is half that (1.85% vs. 2.00% is 92% ratio), so even people in a 15% bracket already benefit from munis. A higher tax rate (especially on the top end) isn't going to create more investors looking at munis (though it may make existing shoppers more motivated).

    2. We see the revival of an 18% long long capital gain rate - so the increase isn't as much as this would appear, at least for buy and hold investors.

    3. The real killer for the middle class (remembering that middle class investments are largely tax sheltered) is the expiration of AMT patches. If they do expire, AMT taxes are projected to hit 4/9 of taxpayers reporting $75K-$100K of income
  • catch22catch22
    edited February 2012
    Howdy msf,

    I noted about the AMT a few years back at FA; but I recall no thread action. I have reminded our elected folks in DC of this antiquated tax code; but I guess they are too busy with other work.

    A note from another recent post here from me:

    "Given enough time, I can make most people appear to become rich upon the basis of inflation and tax code. If the current notation of $200K in earnings and above is rich; I can get you there eventually, if I never change the $200K level in the tax code. One may consider that a young couple who have studied their butts away to earn a masters degree and still paying off the student loans wonder why the government thinks they are rich with a gross income of $201K; solely based upon the fact that they are educated and have work that demands the wages they are making. Such a tax code kills incentive to become educated and work hard, eh?"

    These are surely not the best constructed words I have ever written; but the matter of the situation is related to the perversion of the AMT section of the tax code, in particular.

    Not surprising that permanent adjustments do not take place in such a code; as this favors the governments coffers. This code section needs at least a permanent adjust that is tied to CPI or similar.

    As to the capital gains. Well, companies are taxed and then the individual dividend recipient gets taxed and given enough time; perhaps an estate (death tax) is taxed again.

    Lastly, one may expect a most lively session this year from the "lame duck" period congress. 'Course that does not mean that I expect the best of actions from congress; but perhaps some interesting situations.

    Thank you again for your time and thoughts.

    Take care of you and yours,
    Catch
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