Christie And Obama Show What Investors Really Want From Washington

by: Steven Bavaria

While it may only be one isolated instance, the willingness of President Obama and the man who blasted him in the Republican Convention keynote address, New Jersey Governor Chris Christie, to put political differences aside and work for the common good this past week is an example of what most investors (and I would estimate most Americans) are really looking for from their elected officials.

Most investors I know are not ideologues. What they want is for our government to function, for elected officials to work with one another to fashion solutions acceptable enough to both parties to actually get passed by Congress, signed by the President and go into effect.

Our country's problems are far from unsolvable. Up until now, we have demonstrated a lack of political will, not of economic, human or natural resources, in the addressing of our nation's challenges. We certainly have all the resources we need to solve our long-term fiscal problems, if we can get both parties to work together the way they routinely did not too many decades ago.

An obvious example is the potential "grand bargain" that we have so often heard about, which would involve compromises from both the left and the right to address future budget deficits by a combination of expenditure cuts and tax increases, especially at the higher income levels. The vehement opposition by many on the far right to increases in marginal tax rates for the most wealthy among us, does not represent the view of most investors I know.

A simple analysis of the numbers explains why. The current highest marginal tax bracket - 35% - kicks in when a single person or married couple's income reaches $388,345. If that rate were raised to 40%, and the other rates were held steady, it would increase the taxes of a family earning $500,000 (after deductions and exemptions) by $6,043, or 4.2%. The family's overall tax rate (i.e. not the marginal rate, but the average or blended rate) would rise from 29% to 30.2%.

The same family earning $1,000,000 would see its taxes rise by $31,043, or 9.7%, because its higher income means it would be paying a larger percentage at the highest marginal rate. The family's overall tax rate would increase from 32% to 35.1%.

Reasonable people can differ over whether an overall tax increase from 29% to 30.2%, or from 32% to 35.1%, is a lot or a little; or whether it would be well worth it if it were part of a grand compromise that put the United States back on a solid fiscal trajectory.

But most investors I know feel it would be well worth it, and here is why. Most investors with incomes of, say, $500,000, probably have investment portfolios of at least twice that, or $1 million. Most investors with incomes of $1 million probably have at least $2 million in an investment portfolio. I believe - and most investors I talk to about this agree with me - that the lack of certainty about the willingness of our political parties to work with each other to solve problems is a tremendous drag on our equity market. If investors saw a change in Washington, a willingness to work together, compromise and build consensus the way many of us remember politicians used to do in the past, it would create an optimism in this country that we haven't seen for years. That would spill over into the stock markets, and the gains investors would make from both (1) the renewed optimism, and (2) the sounder fiscal base that would underpin our economy in general following such a political "grand bargain" would offset, many times over, the additional taxes that wealthier people would have to pay. (I have deliberately understated the benefit to most investors in these tax brackets, since many with incomes in these ranges (1) have portfolios far greater than the examples given, and (2) utilize other tax strategies to minimize taxes.)

For example, a 5% stock market gain on the $1 million portfolio of the $500,000 a year family would be $50,000, far more than the $6,000 more in taxes they pay. A 5% gain on the wealthier family's $2 million portfolio would be $100,000, again far greater than the $31,000 increase in their taxes. Critics will say: "You're comparing one-time stock gains with annual tax increases." But does anyone think that a renewed climate of political cooperation and the sounder economic and investment climate it would foster would only lead to gains in a single year? Clearly this sort of fundamental change in the way our political parties work together could and likely would usher in a whole new era of growth. We could finally do all the things politicians just talk about now. The "all of the above" energy program - conventional as well as new sustainable technologies - could finally become a reality. Healthcare, educational initiatives, healthy national industrial policies - all these things could become reality if our politics traded toxicity for tolerance.

This is what serious investors would really like to see. Paying slightly higher taxes to achieve a positive political climate - a Washington that actually works - would be a small price to pay given the dividends that would be reaped by investors, as well as the rest of the country.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.