As always, politicians can announce / publicize their intention to increase income taxes on the 'rich'. However, in reality, the 'rich' can take pre-emptive action to minimize / eliminate the impact of those announced income tax increases. In this case, money is already starting to shift out of commodities / securities and into federal and state income tax free Municipal Bonds.
(snip)"Munis Gain as Tax Cuts Expire in Shift to 40% Bracket (Update1)
By William Selway
Aug. 28 (Bloomberg) -- Wall Street has some election-year advice for its customers: load up on municipal bonds because income taxes for the wealthy are bound to rise.
With a record budget deficit of $482 billion awaiting the next president, strategists are betting Democrat Barack Obama and John McCain, the presumptive Republican nominee, will be forced to increase charges for top earners. That would boost the value of the tax exemption on income from state and local government debt, which has eroded since Ronald Reagan made cuts a pillar of his administration when he took office in 1981.
``Tax rates are going to be higher no matter who's elected,'' said Craig Elder, the fixed-income analyst in the private wealth division at Milwaukee-based Robert W. Baird & Co., which oversees $60 billion for individuals. ``If you're in the top tax bracket, munis are your strong buy right now.''
Obama, who was formally nominated at the Democratic National Convention in Denver yesterday, plans to boost costs for couples earning more than $250,000 a year by rolling back the highest two brackets to where they were before President George W. Bush's tax cuts were passed in 2001 and 2003. The top rate will return to 39.6 percent, according to Obama's campaign Web site.
McCain says he would leave the top bracket at 35 percent when Bush's measure expires in 2010, and push through more reductions, including a lower rate for corporations. Investors say Congressional opposition and a national debt of $9.62 trillion, an amount equal to 67 percent of the nation's gross domestic product, will derail McCain's plan.
`Money to be Made'
States including California and New York, wrestling with deficits caused by the slumping economy, have also proposed raising taxes to pay for government services.
``If you've got a two- or three-year, or preferably a longer time horizon, I think there's money to be made in the muni market,'' said George Strickland, who invests $3 billion in municipal bonds for Thornburg Investment Management in Santa Fe, New Mexico.
Any source of demand would provide a respite for the $2.66 trillion of municipal bonds outstanding. The securities are headed for their worst performance since 1999, returning 1.26 percent, after losses on debt linked to subprime U.S. home loans cost the biggest bond insurance companies their AAA credit ratings. That led some investors to sell the tax-exempt bonds those companies backed.
The return on muni bonds this year compares with a 4.13 percent gain for Treasuries, according to Merrill Lynch & Co. index data. "(snip)
the kicker for 'small time' investors, though, is that the purchase of a single high yield high quality muni bond typically involves a $50,000-$100,000 outlay. Those of us who don't have this kind of cash do have the option of 'subdivided' bonds involving a $5,000 outlay, or ETF and mutual funds with no minimum outlay. But as always, the net returns from 'subdivided' bonds or ETF's or mutual funds carry a lower interest rate than the 'real thing'.
Even so, if you live in a high income tax state like New York or California, and if you earn $75k+ per year, even the 3-4-5% rates of return available from the low outlay Muni Bond options start to look very attractive versus 5-6-7% fully taxable earnings which are about to be hit at a combined federal and state tax rate of 40%+ !!!



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