Investing Under a New Tax Regime
Now that the primaries for both US political parties are over, it is time for investors to begin to evaluate the likely tax change scenarios under the new government that will soon be installed.
All signs are that taxes will rise, but how much and in what ways will differ depending on who is president and which party controls the House and the Senate.
None of the changes are likely to be favorable to investors in general. Accordingly, there will probably be shifts in what is more or less attractive to investors, with resulting changes in money flow and returns for types of investments. Company behavior may change as well.
For example, dividends are a case in point. After the tax laws changed to reduce taxes on dividends, equity income became more popular, several high-yield funds were launched, and companies increased dividend payouts.
If dividends taxes are increased, there may be a shift toward capital gains which can at least be deferred until a position is closed.
If that becomes the situation, higher yield sectors such as utilities and financials may become less attractive while lower yield sectors such as technology may become more attractive. Companies may also reduce the rate of growth of dividends and commit more funds to stock repurchases.
That is one example, but there are many possibilities. Here a few more:
The prospect of carbon taxes introduces an extraordinary wild card in the tax mix. How that would percolate through the economy is uncertain, but likely dramatic.
Now is the time for investors to think about the probabilities and to formulate plans to adjust portfolios appropriately when the tax changes become clear and imminent.
Richard Shaw
QVM Group LLC
[securities mentioned in this article: VTI, IVW, SPY, TLT, IVW, XLE, IHF, BND, EFA, DVY, MUB, IVE, PUW, IBB]