No need to ask wealthy investors in the US “why the long face?” They are bracing for a letdown no matter who wins this week’s presidential ballot. Almost everyone, it seems, is expecting the rich to part with a bit more treasure as Washington scrounges for revenue.
The consensus now holds that President Obama’s recipes – which include ending Bush-era tax breaks for the wealthy on income and investments – are grimmer for most bigwigs than challenger Mitt Romney’s upbeat-sounding but still opaque promise to lower the top rates and somehow balance it by capping today’s generous deductions.
In one oft-cited scenario, the tax on dividends earned under Obama’s plan would turn the fine wine of today’s 15 per cent rate into rank vinegar by treating it as ordinary income – with a top marginal tax rate of 43.4 per cent for some investments, after tacking on a new healthcare levy. Even Romney, however, says with his plan the wealthy will shoulder an equal or greater tax burden.
Worry over tax woes is drumming up talk that the smart money will bank planned investment earnings in the coming weeks in order to “lock in” 2012 rates. It also stirs anew arguments over how higher taxes sway the economy and the markets.
The jousters square off from predictable angles: Republicans insist higher taxes discourage investing, depriving the economy of needed capital. Meanwhile, Democrats point to Bill Clinton’s presidency, when taxes were higher but the US economy outperformed the lower-tax George W. Bush era that followed.
Any deft hand, of course, can paint a picture by numbers. For instance, from a new UBS Wealth Management Americas poll of 1,000 US wealthy investors, framed around the elections, we could say it is a cheery sign that 39 per cent of them would invest “found money” immediately and another 26 per cent would seek investment opportunities.
Or we could damn the data as a slap to decent capitalists because 100 per cent were not raging to invest. (The poll missed an obvious question: Where exactly might we find this “found money”?).
We can slice the squabble even more thinly to ask how higher taxes impact the markets. For instance, David Sowerby, portfolio manager at Boston’s Loomis, Sayles & Co, examined data from the last 40 years to find higher taxes damping stock market growth.
Mr Sowerby takes years in which the Tax Foundation’s “Tax Freedom Day” – the point at which the entire US has “earned” enough to pay its total annual tax bill – moved backwards or forwards by 3 per cent, and compares it with S&P 500 index performance in the following year. The verdict: After years in which Tax Freedom Days came sooner, the S&P followed by rising 3 to 4 per cent above average, and in years after the “Freedom” dates stretched later, the index slumped on average by 3 to 4 per cent.
Then there’s the comparison that Luciano Siracusano III, chief investment strategist at New York’s WisdomTree Investments, outlined at a recent FT-hosted forum – how the S&P 500 performed in the decade following the Clinton tax hikes of 1993, against the near-decade since the 2003 Bush tax cuts. The envelope, please: The S&P in Clinton’s era logged a hearty 10 per cent annualised return, while in Bush’s time, it slouched just under 7 per cent yearly.
Into that fuzzy debate, let’s foist one more theory rooted in recreational psychology, or perhaps only mischief: Higher taxes should beget more investment activity by the rich on balance precisely because they will try to make up for the extra levies paid. Maybe markets outperformed in Clinton’s day because wealthy investors felt cheated by higher taxes, and therefore were more anxious, industrious, and eager to find higher returns.
Conversely, what might tax cuts do? Well, it might make these marginally richer folk complacent, content to rake in yield on comfier portfolios. (This meshes nicely with Romney’s now-famous comment that government “handouts” make their recipients lazy).
Admittedly, this idea wobbles on stilts, and would be absurd at extremes. Taxing the rich at 100 per cent might not spark much investment, for instance. Still, it may just be that those grand social engineering schemes to spur the poor to better themselves might also work on the moneyed among us.
Tom Stabile is associate editor of FundFire, a Financial Times service