Tuesday, November 20, 2012

Rich People Complain That Fiscal Cliff Deal Could Force Them To Pay Slightly Higher Taxes

For more than a decade, America’s top income bracket has enjoyed a period of exceptionally low tax rates thanks largely to caps on investment income and tax cuts put in place by former president George W. Bush. These super-rich Americans have fared well under President Obama, too; corporate profits are skyrocketing and the total number of millionaires in the US has exploded during his term.

But now, with Obama signaling that he will raise taxes on wealthy Americans next year, many of these individuals are scrambling to dodge the higher rates. The New York Times profiles several wealthy investors bemoaning the higher tax rates promised by President Obama next year.

These individuals are now attempting to avoid potential increases in tax rates by cashing out now:

  • – John Moorin, the founder of a medical equipment company near Indianapolis, said he sold about $650,000 in dividend-paying stocks like McDonald’s and Coca-Cola a few days after the election, worried about the potential increase in taxes. “I love these companies, but I’m so scared that now all of the sudden I’m going to get taxed at such a rate with them that they won’t be worth anything,” Mr. Moorin said.

  • – Although [casino magnate Steve Wynn] has declared special dividends at the end of the year before — most recently in 2011 — in a call with analysts last month, he hinted that higher taxes would cause him and other chief executives to rethink big payouts in future years. In the meantime, he added, it was “very difficult to do long-range planning with a government that moves as much as this does on so many issues.”

  • – Dyke Messinger, chief executive of Power Curbers in Salisbury, N.C., said he would like to fill four slots at his construction equipment company but would only hire three people because he anticipated that his tax bill would rise by $100,000. “It’s not a huge amount of money,” Mr. Messinger said. “But it’s enough money that you don’t want to make a misstep.”

Obama has promised to veto any debt limit deal that does not raise taxes on the wealthiest Americans. In response, many of these affluent individuals are planning to dump their stocks before their capital gains rate, which is in some cases as low as 0 percent, possibly rises in 2013.

However, there is not much logic behind the hysteria. As the Wall Street Journal’s Jason Zweig explains, dumping stocks before the end of the year for fear of “Wall Street’s latest bogeyman” of higher capital gains rates actually makes little sense. For most investors, “paying higher taxes later beats paying lower taxes now; the longer you can keep Uncle Sam out of your pockets, the more wealth you should be able to build.”

Despite the alarm raised by Wall Street, tax increases are likely to only affect 4 million out of 114 million American households, and most wealthy earners will not in fact lose their incentive to earn more revenue. A recent study on millionaires in California, where taxes have been increased on wealthy residents, found that millionaires were actually less likely to move after higher taxes.

While these wealthy investors grapple with the slight uptick in their tax rates, low-income Americans, seniors, and people with disabilities at the other end of the spectrum are bracing for devastating spending cuts to necessary entitlement programs Republicans hope to push as part of a deal to avert the so-called “fiscal cliff” early next year.

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