Chris B

2009 Economic Forecasts Ignore Demographic Shift

I agree with the other posters that the demographic point is the most interesting one. The baby boomers are at or near the end of both their earnings potential and their access to credit. They have seen their retirement investments decimated even as their credit card balances have skyrocketed. Their too-big McMansions are now worth less than their mortgage (and their kids can't afford to own the thing, even if they could get a mortgage, which is why they live at home until they're 30). Though boomers control most of the middle-class wealth in this country, their debts (and the national debt) will prevent most of that wealth from being transferred to the next generation. Their massive healthcare expenses have just begun.

Because so many boomers defaulted on everything from mortgages to car loans to credit cards in the last few years, credit may be permanently tighter for generations X and Y. This will impair their ability to take on debt and will result in a forced austerity regardless of what they would like.

Increasingly, it looks like the life goals of generations X & Y will be to take care of their broke, aging parents rather than accumulating the status symbols that broke the boomers in the first place. They will come to see the purchase of new cars, fancy furnishings, vacations, and big houses as the unfortunate mistakes that destroyed their family wealth and stability, and shun those decisions accordingly.

We can expect intergenerational tensions soon, as the retired boomers vote to raise taxes on the struggling younger generations to support their lifestyle and healthcare. The acrid politics of the future might prompt many members of the younger generations to just walk away from their dependent yet still self-centered parents. It could get ugly.

Tax-Loss Harvesting: Trickier in More Volatile Times

But what about proposed changes in the LT capital gains tax rate? What if the Bush tax cuts on capital gains go away (Obama campaign promise) and cap gains taxes revert to, say, 25%?

Should I sell a loser now to offset LT cap gains taxes at a rate of 15% or should I sell it later to offset LT cap gains taxes at 25%?

Suppose I bought at $100 in 2007, sold at $60 a year later, and offset 15% taxes on $40 of profit from another investment. The immediate tax benefit of doing this is ($40)(.15)= $6. I then reinvest my $60, which goes back up to $100 in a couple years, at which point I sell. Tax rates by now are 25% instead of 15%, so I owe ($40)(.25) = $10 in taxes. In this scenario, I save $6 now only to end up paying $10 later. Had I just held my investment through the dip instead of tax harvesting in a time of rising taxes, I wouldn't be out $4, as my original purchase price ($100) and my eventual sale price ($100) would be the same. My balance would be $100 + $6 tax savings - $10 tax bill = $96 instead of $100 if I had just held.

If we assume reinvestment of the $6 tax saving and appreciation at the same rate as before, then $66 becomes $110 for a gain of $44 and taxes of (.25)($44)= $11. My balance would be $110 - $11 = $99 instead of $100 if I had just held.

I know the bird-in-hand argument applies, but when you can see higher taxes coming from a mile away, is it rational to accept a lower return on your action? Does anyone believe cap gains taxes won't rise within the next couple years?