Today's Examination Of Yesterday

Tyler Durden's picture

Via Mark J. Grant, author of Out of the Box,

“Until we can re-establish a condition under which the earnings of the people can be kept by the people, we are bound to suffer a very severe and distinct curtailment of our liberty.”

                    -Calvin Coolidge

I left yesterday for the bobbling heads. Those small dolls resident in the back of car windows that nod up and down as you go over every bump in the road. I left yesterday for the media spinners. Those that are paid to turn diamonds into lumps of clay and then back again by the glittering facets of their arguments. I left yesterday to the artists of verbiage that weave arguments of their own accomplishments much as the artists of Three Card Monty hide the truth behind their shells. I left all of that for yesterday so that today we could examine the reality of that which we have been presented.

Yesterday we had a nice rally in the equity markets. No surprise; the sigh of relief was palpable that Congress did something, anything to address our fall over the cliff. I would not get too excited however. We raised taxes, we penalized those succeeding and we did it in a meaningful manner. We did not cut the national debt as sung by the chorus across the airwaves. In fact, according to the Congressional Budget Office we decreased revenues by $3.6 trillion over ten years. We did not protect the middle class, but because of the expiration of the payroll tax decrease, Federal taxes will rise for 77% of all working Americans. Thus we rewarded non-working Americans at the expense of those with jobs. For those that are truly succeeding, making over one million dollars, we increased their taxes by $171,300.00 on average which becomes a disincentive to progress or a very good reason to explore tax avoidance and gimmickry. We still face “sequestration” in March and the “debt ceiling” in February and nothing was done to curtail our social and entitlement programs that cannot be afforded without even more debt and mountains of it regardless of all of the new taxes. The game was the continuation of postponement and avoidance and reckless governance of the nation.

The spin is that the increase in taxes on capital gains and dividends will rise from 15% to 20% (a 25% increase) but this is not accurate. Under the Affordable Care Act, which is in effect today, there is another 3.8% tax which raises taxes on capital gains and dividends to 23.8% which is a 37% total raise. So much for the value of appreciation and the value of dividends if you start out yards behind the eightball. Then you can feel very proud of our President and our Congress because they feathered the nests of so many peacocks in the process. GE’s tax bill was lowered along with several other companies with the $111.2 billion extension for off-shore financing. How about $78 million for Nascar, $248 million for films and TV programs in additional depreciation and $222 million in a special exemption for imported rum.

Unintended consequences

One of the unintended consequences of all of these new taxes may be a population shift in the United States. Many people in higher income states like CA, NJ, NY or CT will be paying well over 50% now between Federal taxes (39.6%), the rise in Social Security taxes (2.00%), the new Obamacare tax (3.8%) and the increase in Medicare taxes (1.45% to 2.35%). Add to this state income taxes and many people in those states will be paying 50-60% of their income in combined taxes. These are levels of taxes where not only disincentives come into play and where tax chicanery is multiplied but where people and possibly corporations will change locations based upon what the various governments take from their pocketbook.

The Best Bet

There was lots of talking about it and speculation was rampant but Municipal bonds were left alone in the new legislation. The major indices for Munis had declined around 3.5% prior to the new laws but yesterday, when long Treasuries were off 1.75 points, these same indices were up around one point. I have long suggested buying Municipals as many credits are cheaper than corresponding corporates on an apples to apples yield basis given the ratings. Forget the tax consequences; the absolute yields on many Municipal bonds are better than equally rated Corporate or Mortgage backed bonds. Municipals now represent the last large pocket, the last asset class of investments, where tax exemption may be found and this is now far more important than it was on he final day of the last year. I suggest getting in now because Muni’s will compress and keep compressing against Treasuries and there is very good value now to be found here.

“This country would not be a land of opportunity; America could not be America, if the people are shackled with government monopolies.”

                          -Calvin Coolidge