A Word About Taxes: Relax

11/26/2008 12:00 pm EST

Focus: MARKETS

James Stack

President, Stack Financial Management

Jim Stack, president of Stack Financial Management and InvesTech Research, thinks fears about higher taxes under President Obama may be overblown.

The victory of Barack Obama was a historic one. Yet the sharp two-day decline after Election Day was a negative reaction by conservative investors and high-income individuals to Barack Obama’s pledge to redistribute wealth—from the highest 5% of net income earners to the other 95%.

Why shouldn’t conservative high-income individuals fear for their portfolios and run for cover while capital gains taxes are still low?

No one likes higher taxes—period! However, we’re concerned that these “fears” of what lies ahead under an Obama Administration and Democrat-controlled Congress may be overblown and may even cause individuals to make financial decisions that are not in their best long-term interest—i.e., abandoning the stock market in favor of tax-exempt bonds just to avoid the prospect of higher capital gains or dividend tax.

The mere mention of this topic has every conservative shaking in their shoes. In fact, there’s compelling evidence that the majority of the public is not really in favor of redistributing wealth in order to solve our economic woes.

In a recent AP poll, 72% expressed confidence that President-elect Obama will be able to revive the stalled economy. However, “only about one in three (36%) said they wanted Obama to make income tax cuts a top priority when he takes office, and even fewer wanted higher taxes on the rich to be a primary goal.”

So what is the Obama tax plan? We found one of the best summaries on The Tax Foundation Web site (www.taxfoundation.org).

President-elect Obama proposes to increase the top two tiers of income tax rates from 33% to 36%, and 35% to 39.6%. In reality, this unwinds the tax cuts for these higher-income individuals which were passed under George W. Bush during his two terms in office.

Historically speaking, this top tax rate remains far below the extreme 67% to 94% top tax rate that existed for 50 years from 1932 to 1982.The new president-elect also proposes to raise the tax-favored rate on long-term capital gains and dividends from 15% to 20% for couples earning over $250,000—which is still much lower than what existed in the early 1990s.

We’re not speaking as advocates of the Obama tax plan or such tax increases. In fact, we would argue that, like 1932, significantly increasing the taxes on any segment of the population could prove to be a major blunder. After all, if the government demoralizes successful business owners and wage earners most capable of investing/spending our way out of recession, then who will save the economy?

Bottom line, we expect strong pressure against any additional tax increases, other than what President-elect Obama already has on the table. And historically speaking, the proposed increase should not compel investors to abandon stocks (at low valuations) and seek tax-exempt bonds when Treasury yields are near their lowest levels in 50 years.

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