Posts tagged ‘capital gains’
April Flowers Have Investors Cheering Wow-sers!
Normally April showers bring May flowers, but last month the spring weather was dominated by sunshine that caused stock prices to blossom to new, all-time record highs across all major indexes. More specifically, the S&P 500 jumped +5.2% last month, the NASDAQ catapulted +5.4%, and the Dow Jones Industrial Average rose +2.7%. For the year, the Dow and S&P 500 index both up double-digit percentages (11%), while the NASDAQ is up a few percentage points less than that (8%).
What has led to such a bright and beaming outlook by investors? For starters, economic optimism has gained momentum as the global coronavirus pandemic appears to be improving after approximately 16 months. Not only are COVID-19 cases and hospitalizations rates declining, but COVID-19 related deaths are dropping as well. A large portion of the progress can be attributed to the 246 million vaccine doses administered so far in the United States.
Blossoming Economy
As a result of the improving COVID-19 health climate, economic activity, as measured by Gross Domestic Product (GDP), expanded by a healthy +6.4% rate during the first quarter. Economists are forecasting second quarter growth to accelerate to an even more brilliant rate of +10%.
As the economy further re-opens and pent-up consumer demand is unleashed, activity is sprouting up in areas like airlines, hotels, restaurants, bars, movie theaters and gyms. An example of consumer demand climbing can be seen in the volume of passenger traffic in U.S. airports, which has increased substantially from the lows a year ago, as shown below in the TSA (Transportation Security Administration) data.
A germinating economy also means a healthier employment market and more jobs. The chart below shows the dramatic decline in the number of jobless receiving benefits and pandemic unemployment assistance.
Fed Fertilizer & Congressional Candy
Monetary and fiscal stimulus are creating fertile ground for the surge in growth as well. The Federal Reserve has been clear in their support for the economy by effectively maintaining its key interest rate target at 0%, while also maintaining its monthly bond buying program at $120 billion – designed to sustain low interest rates for the benefit of consumers and businesses.
From a fiscal perspective, Congress is serving up some sweet candy by doling out free money to Americans. So far, roughly $4 trillion of COVID-19 related stimulus and relief have passed Congress (see also Consumer Confidence Flies), and now President Biden is proposing roughly an additional $4 trillion of stimulus in the form of a $2 trillion jobs and infrastructure plan and a $1.8 trillion American Families Plan.
Candy and Spinach
While Congress is serving up trillions in candy, eventually, Americans are going to have to eat some less appetizing spinach in the form of higher taxes. Generally speaking, nobody likes higher taxes, so the question becomes, how does the government raise the most revenue (taxes) without upsetting a large number of voters? As 17th century French statesman Jean-Baptiste Colbert proclaimed, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
President Biden has stated he will only increase income taxes on people earning more than $400,000 annually and increase capital gains taxes for those earning more than $1,000,000 per year. According to CNBC, those earning more than $400,000 only represents 1.8% of total taxpayers.
Bitter tasting spinach for Americans may also come in the form of higher inflation (i.e., a general rise in a basket of goods and services), which silently eats away at everyone’s purchasing power, especially those retirees surviving on a fixed income. Federal Reserve Chairman Jerome Powell sees any increase in inflation as transitory, but if prices keep rising, the Federal Reserve will be forced to increase interest rates. Such a reversal in rates could choke off economic growth and potentially force the economy into a recession.
If you strip out volatile energy prices, the good news is that underlying inflation has not spiraled higher out of control, as you can see from the chart below.
In addition to the concerns of potential higher taxes, inflation, and rising interest rate policies from the Federal Reserve, for many months I have written about my apprehension about the speculation in SPACs (Special Purpose Acquisition Companies) and cryptocurrencies like Bitcoin. There are logical explanations to invest selectively into SPACs and purchase Bitcoin as a non-correlated asset for diversification purposes and a hedge against the dollar. But unfortunately, if history repeats itself, speculators will eventually end up in a pool of tears.
While there are certainly some storm clouds on the horizon (e.g., taxes, inflation, rising interest rates, speculative trading), April bloomed a lot of flowers, and the near-term forecast remains very sunny as the economy emerges from a global pandemic. As long as the government continues to provide candy to millions of Americans; the Federal Reserve remains accommodative in its policies; and the surge in pent-up demand persists to drive economic growth, we likely have some more time before we are forced to eat our spinach.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 3, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Plucking the Feathers of Taxpaying Geese
“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” ~Jean Baptist Colbert
With exploding deficits, multiple wars, healthcare reform, and a sluggish economy, there are two logical immediate choices on how to improve our current financial situation:
1) Cut spending. This is not a desirable option for politicians since benefit cuts to voters are not appreciated come re-election period.
2) Raise Taxes. Not desirable from a voter standpoint either, but the Obama administration has chosen to target the rich – the smaller voting population. This can of course backfire, when many of these wealthy individuals are campaign contributors or have ties to lobbyists who are backing the President’s agendas.
The tax-paying geese are getting fatter, but before the goose can be put in the oven, the feathers need plucking with the goal of minimizing hissing. Sure, I am an advocate for tax cuts like most taxpayers. I’m even a larger proponent, if Congress had the political gumption to cut spending to fund the tax drops. Unfortunately, politicians view expense reduction as suicide because cutting programs or benefits will only lead to fewer reelection votes. Congressmen are perfectly fine letting taxpayers live high on the hog for now, and just saddle future generations with our mounting debt problems.
What’s Fair?
The current strategy is based on taxing the wealthy to fund deficits, healthcare, wars, debt, etc. Since the rich represent a smaller proportion of voters, from the egotistical politician standpoint (reelection is paramount), this wealth distribution strategy appears more palatable to incumbent legislators. Democrats would rather focus on squeezing a narrower demographic footprint of voters versus an across the board tax increase, which would impact all taxpayers. Merely taxing the rich can certainly backfire however, especially if the wealthy demographic getting taxed is the exact population paying for the politicians’ reelection and lobbying agendas.
Source: Alan’s Money Blog (U.S. has high corporate tax rate)
But at what point is taxing the rich unfair and counterproductive? Currently the top 10% of the nation that earns more than $92,400 a year, pay about 72% of the country’s income taxes. Ari Fleischer, former G.W. Bush Press Secretary compares the current tax policy to an “inverted pyramid scheme” in a Wall street Journal Op-Ed earlier this year. Like an upside spinning top, the whirling pyramid is supported by a narrow, pointy pinnacle.
Fleischer goes onto add:
“According to the CBO, those who made less than $44,300 in 2001 — 60% of the country — paid a paltry 3.3% of all income taxes. By 2005, almost all of them were excused from paying any income tax. They paid less than 1% of the income tax burden. Their share shrank even when taking into account the payroll tax. In 2001, the bottom 60% paid 16.3% of all taxes; by 2005 their share was down to 14.3%. All the while, this large group of voters made 25.8% of the nation’s income. When you make almost 26% of the income and you pay only 0.6% of the income tax, that’s a good deal, courtesy of those who do pay income taxes.”
Cheaters Should Not Be Exempt (See Celebrity Tax Evader Article)
Certainly loopholes and undeserving credits for multinationals and the wealthy should be removed as well. The House of Representatives recently approved a $387 million boost for the IRS to fund a high-wealth unit focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals (read Reuters article). The IRS is also opening new criminal offices in Beijing, Panama City and Sydney to focus on international enforcement of tax cheaters. At the center of the IRS’ offshore effort is the legal cases against Swiss banking giant UBS (stands for Union Bank of Switzerland), which resulted in UBS agreeing to turn over almost 5,000 client names and pay $780 million to settle tax evasion charges.
Taxes in 2010 and Beyond
When it comes to future taxes, a lot of details remain up in the air. What we do know is that the 2001 Bush tax cuts are set to expire in 2010 and the Obama administration has indicated they want to raise taxes on the rich (those earning more than $250,000) and keep the cuts static for those in the lower paying tax brackets.
- Healthcare: If healthcare reform will indeed pass, those benefits won’t be free. The Obama administration is backing a House bill that creates a 5.4% surtax on income over $500,000 for single filers or $1 million for couples.
- Income Taxes: On the income tax front, Obama and some Democrats are pushing to have the two highest tax brackets revert back to the pre-2001 levels of 36% and 39.6%.
- Capital Gains: If the Obama administration gets its way, capital-gains tax rates would go back to 20% for wealthier individuals and qualified dividends would be taxed as ordinary income up to the top rate of 39.6%.
- Estate Taxes: The House passed a bill earlier this month that makes the 2009 estate tax provisions permanent (i.e., a 45% top marginal rate on estates larger than $3.5 million or $7 million for married couples). If the Senate were not to pass the bill, current law has the estate tax rate reverting to a 55% rate on estates worth more than $1 million after next year.
Given the exploding deficits and weary economy, which is recovering from a severe economic crisis, getting our tax policy situation back in order is critical. Having politicians make tough tax policy decisions runs contrary to their partisan reelection agendas, however our country needs to pluck more feathers from our taxpaying geese to face these monumental economic challenges…even if it requires listening to irritating hissing from our citizens.
Ari Fleischer WSJ Op-Ed From Earlier This Year
Article on Tax Policy Issues for 2010 and Beyond
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in an security referenced, including UBS. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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