Fisher Investments Editorial Staff
Taxes, US Economy

Uncle Sam’s Payday

By, 04/15/2010

Story Highlights:

  • Deficit worries are rising to the top of the political agenda, and some are proposing higher taxes to close the deficit gap.
  • Any tax increases (including those from the recently passed health care bill) will likely take effect a few years from now.
  • As the economic recovery continues and unemployment improves, tax revenue will likely rise, possibly weakening the argument for higher taxes to close the budget gap.
  • Long-term investors needn't worry about the threat of higher taxes—historically, we're still within bearable levels, and any tax raises are US-only so far, further diluting their effects on global portfolios.

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It's April 15th, and we all know what that means: Payday for Uncle Sam! In other words, taxes. Hooray! You can almost hear the collective groans of US residents wildly shuffling papers while frantically attempting to understand what they need to fill out and why (Why do I have to put this number on line 2b for form 357-29R? Why that particular number?!). It's a truth universally acknowledged that everyone, everywhere, hates taxes—not just because they may have to pony up, but because the US tax code is absurdly complicated any way you look at it—with thousands of loopholes and caveats. (So much so that the latest calculations show in 2009, about 47% of Americans will pay no income tax after deductions and tax credits!)

Unfortunately, the process isn't apt to get simpler anytime soon, and (sorry to say) taxes seem likely to rise in the coming years. Deficit worries are fast rising to the top of the political agenda, and proposals to help close the deficit gap range from raising taxes on the "wealthy" to raising taxes on everyone via a value-added tax (VAT). Additionally, the recently passed health care bill has a slew of tax increases—though it's important to note none take effect earlier than next year, with the most material several years down the road.

Truth is, no matter who's in office and what the current agenda is, it's hard to know precisely what our tax bill will be a couple years from now. Taxes are a highly politically charged topic. What passes depends on how successful politicians are at putting today's proposals into practice tomorrow. Plus, political will matters. Those very same politicians inking tax raises now can turn around and ink tax cuts later—it all usually depends on what best ensures their political survival. (The unusual events surrounding the recently passed health care bill notwithstanding—the exception proving the rule.) And though the deficit is a hot-button issue currently, it may not have staying power. As the economic recovery continues and gains steam, rising incomes—including additional incomes as more people rejoin the workforce—naturally translate into higher revenue, possibly weakening the higher-taxes-to-close-the-deficit-hole argument. And there's already some very preliminary evidence this is happening.

On the macro level, we don't like higher taxes because they discourage creation of new businesses—or folks simply vote with their feet—picking up and moving from higher- to lower-tax states or countries, resulting in fewer net tax receipts. But, overall, we don't think threatened tax hikes should much affect markets, for several reasons. First, they're still within historically bearable levels (much lower, in fact, than in other bull market periods throughout history); and second, taxes are only one of very many drivers long-term investors must consider.

For instance, right now, positive fundamentals as a whole seem likelier to drive us higher—and the positives far outweigh the threat of higher taxes or any other negatives out there. Plus, this is a US-only issue—think globally, and the tax effect is diluted even further. So while some would have us believe higher taxes spell doom for the bull, long-term investors likely needn't worry about higher taxes (no matter how undesirable) in the near term. So, on April 15th, feel free to curse the tax man. Just don't think the bull market is cursed.

Happy tax day, everyone! (Blech.)

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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