The Bush tax cuts are scheduled to expire and, if allowed to happen, will impact the markets negatively. It’s important that the executive and legislative branches of our government keep them in place.
Here’s why . . .
Dividends and Capital Gains
A common way of valuing stock is to assume it is worth the present value of the cash flow an investor receives from owning it. Put simply, if other factors stay the same and we simply begin taxing dividends at numbers as high as 40% rather than the 15% we are at now, you could potentially lose a third of the value of the S&P 500 Index.
The pain would be felt on the capital gains side as well. Currently, most people pay about 15% and could see their stocks lose about 10% under similar models if this tax rate goes up to 23.8%. Investors can control capital gains taxes by holding on to shares or using certain charitable giving schemes but, with market volatility a real concern, my average client wants these gains taken as made. . . so the taxes matter.
The only thing that will lessen these “worst case” scenarios is recognizing that a large percentage of stock ownership takes place in IRA’s and other retirement plans that don’t get the lower tax treatment anyway when monies are withdrawn.
Income investors already have too few options with rates on investment grade bonds so low. I can’t imagine the frustration caused by letting the tax cuts expire. I can imagine the rally we could see if these cuts are made permanent. We should do everything we can to encourage the parties to get this one right.
Until next week,
Susan R. Linkous
Securities offered through LPL Financial
Member FINRA and SIPC