The elections of last week have made me more sanguine, as an investor, than I have been all year. Why? Because a lame duck Congress that might like to stick it to those who voted against them is thinking more about where their future bread will be buttered. Many of them they are unemployable in the real world, so they will become K Street lobbyists. That means they’ll need to suck up to the crowd that replaced them. And the crowd that replaced them got in, largely, on a platform of returning fiscal responsibility to big government. The newbies don’t want the lame ducks truncating their popularity by failing to extend the Bush tax cuts and the lame ducks don’t want to jeopardize their future 3-martini lunches at the Capital Grille.
The extension of the tax cuts would be enormously good news for Main Street. Whatever your think of the estate tax, until now you haven’t had a vote. It’s been decreed a “soak-the-rich” tax by an administration that believes that the way you earn money in America is to write a grant better than someone else writes a grant and then “the government” gives you money. They simply do not or will not understand that “the government” has no source of income other than taking it from some citizens and, after skimming its take off the top, redistributing the remainder to a different group of citizens.
I have no dog in this fight. My and my wife’s parents, grandparents and other forebears were solid blue-collar folk. Neither of us will ever be burdened with the travails of having to deal with inherited wealth. But Americans define ourselves by many characteristics and a key characteristic that we share is a sense of fair play. Since people often build huge estates within a single lifetime because of the wonders of the capitalist system and the power of their lawyers, some argue that they should say thank you to the rest of their fellow citizens when they no longer have any personal ability to spend the money.
But I must point out that they already paid on these earnings -- whatever they were legally obligated to pay every day of their working life on every cent they earned. It would be more elegant to close the tax loopholes but then let the person who earned it decide what to do with whatever is left over, rather than let an insatiable federal and in some cases state government decide they are “entitled” to some portion of one’s life work. I think a 5% levy to render unto The New Caesars might be fair. But 55%? How stupid do they think we are? (Don’t answer that; there is no end to the contempt these elitists hold us in!)
This has left us with the unique situation where an octogenarian or nonagenarian with a large estate can either die in 2010 and escape all estate taxes or die in January 2011 and pay anywhere from 37% at the lowest end to 55% at the highest. So do they hope to die this year in order to change the future for their children? I don’t think that was the hope and change those who voted for hope and change were expecting.
With just 1 in every 2 Americans (53% versus 47%) paying any income tax at all, we have already reached a point where half of America is becoming attached to a national welfare system, so what’s wrong with asking “the rich” -- you know, those dumb suckers who still pay taxes -- to fork over most of what they made after they die as well as more and more of what they make while living? Because it’s wrong. It offends our sense of fair play.
If we wittingly or unwittingly use the tax code to socially engineer the kind of populace they want to see, with 47% of them able to vote without paying a dime to earn that right, it means that the few areas the Constitution actually assigns to the feds, like national defense, interstate commerce, national infrastructure, et al, which benefit everyone, are paid for by fewer and fewer people. Personally, I’d rather see everyone pay something. Repeal the credits and deductions that aren’t available to everyone, and make everyone feel the pain of supporting the nation’s work. Make $10,000 this year? Paying $500 in taxes, just 5%, will be pretty painful. But at least it makes you a stakeholder.
It is deceitful for the government to claim they are not raising taxes, except on the rich. While it’s true that there need be no new tax levy, simply allowing the Bush tax cuts to expire in the middle of the worst recession since the Great Depression will have the effect of taking money from every taxpayer at a time when every household budget is already stretched to the breaking point. The administration’s answer seems to be (a) they know better how to spend your money than you do, and (b) to be a good American and keep retail sales robust, you should simply continue spending, but do it on credit.
As for (a) above, may I recommend a visit to this page on Senator Tom Coburn of Oklahoma’s website. Outside the Beltway, Americans still have enough common sense to be outraged that the government spent the money in the “stimulus bill” on things like $62 million for a tunnel to nowhere in Pittsburgh, PA that even PA Gov. Ed Rendell called “a tragic mistake”; $308 million for a joint clean energy venture with BP (!); $200,000 to help Siberian communities lobby Russian policy makers; $554,763 for the Forest Service to replace windows in a closed visitor center at Mount St. Helens ; $298,543 to predict the weather on other planets; and $180,935 to discover a better method for freezing rat sperm. (No word yet on which politicians have volunteered to be donors…)
If you think you can (a) spend your money more wisely than the feds and (b) choose not to follow their example and go further into debt, they don’t care. Here’s what happens if / when the Bush tax cuts expire:
Tax rates will go up for everyone, not just the “rich” making over $250,000. Today’s 6 brackets of 10%, 15%, 25%, 28%, 33% and 35% would be replaced by five brackets with the higher rates of 15%, 28%, 31%, 36% and 39.6%. Today’s rate on long-term capital gains and qualified dividends is 15%. Starting next year, the maximum rate on long-term gains will increase to 20%, and the maximum rate on dividends will be taxed as ordinary income, so that means it will go as high as 39.6%. Taxpayers in the lowest two brackets of 10% and 15% currently pay nothing on capital gains held a year or more and on all qualified dividends. Starting next year, they will pay 10% on long-term gains and 15% to 28% on dividends.
Finally, all those complex-for-the-sake-of-complexity phase-out rules would come back. Basically, if you make more than x amount, your itemized deductions for mortgage interest, state and local taxes, charitable donations and other lawful deductions will be lessened in stages until you get no benefit whatsoever for them. Ditto for your personal exemptions.
You can see why, even with the hassle of K-1s, I may be willing to once again recommend MLPs for your consideration. If you are in the highest bracket and have $20,000 in corporate dividends you will pay $7,920 of it to fund your part in teaching Siberians how to lobby their government and figuring out how to freeze rat sperm better. But in an MLP, a substantial part of your distributions may be structured to simply reduce your basis price, after which you’ll pay the lower capital gains taxes, and then only when you finally sell. In a municipal bond fund, you might only make 3.5% a year but that will translate into a pre-tax 5.8%. If we can find munis that are safer and yield as well or better after-tax, we will.
It is a basic law of the political jungle that if the government can get away with taxing it, they will. And if they tax it, they will spend it -- all of it. And more. Us hicks in the private sector know the best way to keep the country growing is private investment after appropriate due diligence in the very best companies, ventures and people. We do our homework because it is our money at stake. We don’t send our money to a gulag and we don’t pour it down a rat-hole.
But when bureaucrats are given the responsibility to dispense money that is not their own, why not study the climate on other planets? By the way, I’m not saying prima facie that all these endeavors are worthless. I’m saying that (1) if they’re worthwhile why don’t universities getting $30,000 a student do some of this research on their own, and (2) if it turns out that some majority of taxpayers thinks it is a worthwhile idea to support national defense or infrastructure or commerce or some other proper national-level government responsibility, could we at least wait until the good times return and we have a little mad money? Do we have to spend it just as rapidly in the lean times, as well? And how many American jobs did we stimulate in Siberia?
My belief that Americans have had enough of such lunacy, and that the lame ducks will be prevailed upon to extend the current tax policies, leads me to believe that MLPs, royalty trusts, Canadian income trusts, and good dividend-paying companies will provide more after-tax income than most currently believe.
As a starting point, we are currently buying Rayonier (NYSE:RYN), Plum Creek Timber (NYSE:PCL), Total Petroleum (NYSE:TOT), Exelon (NYSE:EXC), and CML Healthcare (OTC:CMHIF), all this week and last. If you are an income buyer looking to get more dividends from companies offering good growth as well, you might consider them for your own due diligence.
Disclosure: We, and those clients for whom it is appropriate, are buying RYN, PCL, TOT, EXC and CMHIF.
Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
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