Tilted Forum Project Discussion Community - View Single Post - "You Can't Soak the Rich"

aceventura3 · 06-19-2008, 07:13 AM

Recently Obama elaborated on his tax plans. Shortly thereafter, I started to see all kinds of articles and advice on how his tax proposals will affect people and of course strategies on minimizing the impact. Obama is going to raise marginal income tax rates and capital gains tax rates (on the "rich" of course), first the most obvious strategy is for the "rich" to start moving their money into municipal bonds, which are federal income tax free.

So, a wealthy fixed income investor will move money from taxed instruments to non-taxed instruments. And some people not currently investing in fixed income investment may now find them more attractive. The only potential problem is the ATM tax, which Congress is planning on adjusting.

There usually is not a capital gain on municipal bonds held to maturity or those that are called, so there won't be much of an opportunity for capital gains taxes.

You think that this would be good for municipalities - maybe, maybe not. We are mostly looking at bonds already issued and purchasable on the secondary market. All other things being equal, holders of those bonds today may sell them as demand increases (causing the price to go up and the yield to go down), they may incur some capital gains this year. In the future sellers may actually have some capital losses.

All other things being equal, there will be a shift from corporate bonds. Corporations will have to offer higher yields to compete with tax free bonds. If the cost of corporate capital goes up, there will be less capital investment. With less capital investment over time the economy will be negatively affected.

Oh my, to think that in an effort to soak the "rich", the rich would actually respond to minimize their tax burden. And then there are those pesky unintended consequences.

06-19-2008, 07:13 AM	#109 (permalink)
aceventura3 Junkie Location: Ventura County	Recently Obama elaborated on his tax plans. Shortly thereafter, I started to see all kinds of articles and advice on how his tax proposals will affect people and of course strategies on minimizing the impact. Obama is going to raise marginal income tax rates and capital gains tax rates (on the "rich" of course), first the most obvious strategy is for the "rich" to start moving their money into municipal bonds, which are federal income tax free. So, a wealthy fixed income investor will move money from taxed instruments to non-taxed instruments. And some people not currently investing in fixed income investment may now find them more attractive. The only potential problem is the ATM tax, which Congress is planning on adjusting. There usually is not a capital gain on municipal bonds held to maturity or those that are called, so there won't be much of an opportunity for capital gains taxes. You think that this would be good for municipalities - maybe, maybe not. We are mostly looking at bonds already issued and purchasable on the secondary market. All other things being equal, holders of those bonds today may sell them as demand increases (causing the price to go up and the yield to go down), they may incur some capital gains this year. In the future sellers may actually have some capital losses. All other things being equal, there will be a shift from corporate bonds. Corporations will have to offer higher yields to compete with tax free bonds. If the cost of corporate capital goes up, there will be less capital investment. With less capital investment over time the economy will be negatively affected. Oh my, to think that in an effort to soak the "rich", the rich would actually respond to minimize their tax burden. And then there are those pesky unintended consequences. __________________ "Democracy is two wolves and a sheep voting on lunch." "It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion." "If you live among wolves you have to act like one." "A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."