Investing Changes Under a New Tax Regime

Now that the primaries for both US political parties are over, it is time for investors to begin to evaluate the likely tax change scenarios under the new government that will soon be installed.

All signs are that taxes will rise, but how much and in what ways will differ depending on who is president and which party controls the House and the Senate.

None of the changes are likely to be favorable to investors in general. Accordingly, there will probably be shifts in what is more or less attractive to investors, with resulting changes in money flow and returns for types of investments. Company behavior may change as well.

For example, dividends are a case in point. After the tax laws changed to reduce taxes on dividends, equity income became more popular, several high-yield funds were launched, and companies increased dividend payouts.

If dividends taxes are increased, there may be a shift toward capital gains which can at least be deferred until a position is closed.

If that becomes the situation, higher yield sectors such as utilities and financials may become less attractive while lower yield sectors such as technology may become more attractive. Companies may also reduce the rate of growth of dividends and commit more funds to stock repurchases.

That is one example, but there are many possibilities.  Here a few more:

The prospect of carbon taxes introduces an extraordinary wild card in the tax mix. How that would percolate through the economy is uncertain, but likely dramatic.

Now is the time for investors to think about the probabilities and to formulate plans to adjust portfolios appropriately when the tax changes become clear and imminent.

Comments

[Xyrus]

It doesn't really matter who gets elected, taxes HAVE TO raise. You can probably count on the raises being investment related at the very least.

Or rather, either taxes have to raise or government spending needs to be DRASTICALLY reduced. Which do you think is more likely to happen?

On one side we have McCain, who really has all of the financial know-how of an amoeba. I wouldn't trust that guy to balance his own checkbook, let alone approve national budgets. He rattles on and on about earmarks and pork. That's less than 1% of government spending. The cash suckers are the military and social programs. Well he certainly wants to keep military spending high, and there's no way he's going to get a social cut through a democratic congress (not to mention he'd be eaten alive by the media for cutting social programs in a down market). Regardless, he can want to cut taxes all he wants. It's not going to change the fact that our government is flat broke, and we're crossing the $10 trillion dollar mark in debt.

In the other corner we have Barack "The Messiah" Obama. He certainly is a charismatic character, but charisma doesn't balance budgets. Universal Healthcare? How? Where is the money going to come from? In a couple more decades we won't even be able to handle our current social programs. Raise taxes? That's going to require quite a raise, as we can't even cover what we are currently spending. We could cut military spending (like get out of Iraq); that would get us closer to a balanced budget, but we'd still need tax raises to cover the bill.

In truth, I don't envy the position either would have after the disaster of the last 8 years or so. The most likely candidate that would have had the brass ones to do what is necessary for balancing the budget was Ron Paul. Now, it's 6 one way half-dozen the other. No matter who gets elected you can count on more taxes on the rich and more taxes on investments. By that time the poor won't really have any money to tax, since it will be all spent on food and gas. Best case, count on the rates before Bush made his idiotic decision to cut taxes while increasing spending further burying us in the whole with our future sugar daddy China.

~X~

[Nate C]

I agree with Xyrus. Ron Paul is the only candidate that would have balanced the budget. The rest are just crooks and liars that tell the sheeple what they want to hear.

[notsosmart]

yes-as you say the sheeple are marching to slaughter but keeping their eyes on yesterdays sport scores. at least they kow whats important.

[lksseven]

the historical evidence doesn't support Xyrus or Nate C's viewpoint - as usual, political passion neutralizes otherwise normal or above-normal IQ levels ... www.nationalreview.com...


For the facts, here is the first part of the article ...
June 27, 2005, 9:02 a.m.
The Rapidly Declining Deficit
How’s it happening? Look to the tax-rate cuts of 2003.

By Michael T. Darda

According to the Treasury department, the U.S. government took in a single-day record $61 billion in tax receipts on June 15. This surpassed the previous single-day high of $56 billion set on December 15, 2000. The recent surge in tax revenues is not just a one-day event. Fiscal year to date, total government receipts are up 15.5 percent, the fastest rate of increase on a comparable FYTD basis since 1981. The difference between the growth rate of tax revenues and the growth rate of government spending has widened to 8.4-percentage points, the largest since late 2000 when the budget was in surplus.




Not surprisingly, the recent tidal wave of tax receipts has ignited a furious debate about whether or not the Bush tax cuts are responsible for stimulating economic activity enough to actually boost overall tax-revenue collections. Classical economists refer to this as the Laffer curve, or the revenue-reflow, effect. In simple terms, if a tax cut stimulates the underlying activity being taxed, a revenue reflow will result. The reflow can offset or even surpass the volume of revenues that would have been collected under the higher tax rate and smaller tax base. Pro-growth tax-rate reductions on labor and capital in the 1920s, 1960s, 1980s, and then again in 1997 and 2003 all exhibited revenue-reflow effects, although some were stronger than others.

Despite the avalanche of historical evidence, some economists and policymakers question the validity of incentive-based revenue reflows and assert instead that the recent surge in tax-receipt growth has been caused by an increasing fraction of the workforce being ensnarled by the alternative minimum tax (AMT). They also argue that annual comparisons were made extremely easy due to the huge drop in revenues due to the 2000-02 stock market implosion and the 2001 recession that accompanied it. While there is some truth to these claims, they overlook several key facts. ...

[TIRED]

JOHN MCCAIN IS WHO I TRUST HE KNOWS HOW TO BALANCE THE BUDGET YOU HAVE CONGRESS TO BLAME THEY COULD DO SOME WORK DON'T BLAME BUSH FOR ALL