28 February 2010

Fear Over Higher Taxes Distorting Investment Decisions

Ricardian Equivalence negating any supposed benefit from the Stimulus and higher deficits?

WSJ: The Right Way To Squirrel Money From the Taxman

The Great Tax Dodge is under way already.

The how and which of tax increases are still unclear. But there is no question about the if: Higher taxes are coming.

Fearing that tax-code changes could slam fortunes large and small, investors aren't sitting still. In the first three weeks of February, they poured twice as much money into tax-free municipal-bond funds as into all foreign-equity funds combined.

The list of potential rises is long and growing. The likeliest include increases in income and capital-gain rates. Most ominous: lawmakers may breach the wall between wages and investment income by applying Social Security or Medicare taxes to dividends, interest, capital gains, and annuities.

We have been down this road before. Two decades ago, when U.S. debt and deficit levels were on an unsustainable path, market pressures forced the governments under George H.W. Bush and Bill Clinton to cut spending, impose budget constraints, and raise taxes.

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