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Are the Rich Fleeing Equities for Tax-Free Havens in the New Age of Obama?


And if so, does it hurt the economy?

MINYANVILLE ORIGINAL The day after President Obama was re-elected back into the White House for a second term, the stock market tanked, with the Dow Jones Industrial Average (INDEXDJX:.DJI) sliding 3.36%, its worst single-day performance of the year.

The index has recovered somewhat since then, though it continues to hover around the 13,000 mark.

The reason for the post-election shareholder malaise seems obvious: With the looming fiscal cliff yet to be resolved, investors are fearful of the prospect of higher taxes come 2013, and are unloading their stock holdings, which, as the New York Times notes, has hurt the share prices of big names such as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).

"There're multiple pockets of fear. One is that under an Obama administration, it's more likely we'll see higher tax rates for high income individuals, since that was part of his platform. There's some concern about that and what exactly that means, how high those tax increases are going to go, and what sources they will come from -- is it going to be just the income tax, or other increases attached to other legislation?" explained David Twibell, president of Denver-based investment advisory firm, Custom Portfolio Group, to Minyanville.

"There's also some angst out there, just in our client base and people I've talked to, about the overall gridlock in DC and in particular, how it relates to the fiscal cliff. It's political suicide for everybody to do nothing in the face of the fiscal cliff, yet we've got the status quo. [That's] maybe the reason why there's so much angst among people I've talked to," Twibell continued.

The big fear is that the capital gains tax rate will increase from its current 15%. "We've been proactively, if it makes sense from an investment standpoint, selling some positions with long-term capital gains to try and take advantage of that 15% [tax rate]," Twibell mentioned.

For instance, John Moorin, the founder of a medical equipment company near Indianapolis, told the Times that he let go of some $650,000 in dividend-yielding equities such as McDonald's (NYSE:MCD) and Coca-Cola (NYSE:KO) because of a fear of a hike in the tax on dividends.

Some conservatives and business advocates have argued that an increase in the capital gains tax rate will paradoxically hurt tax revenues, because investors will pull their money out of equities and into tax-exempt investments such as municipal bonds.

"I can tell you, just in communication right now I've had with clients and colleagues, that there's going to be a massive shift, in my opinion, among business owners and investors to try and take as much advantage of qualified plans and tax-deferred vehicles as possible. And that's natural. If taxes are going to go up, then people have a choice – they can either be as creative as they can in trying to legally shelter as much income from taxation as possible, or they can pay higher taxes – and it's human nature for people to want to pay as little taxes as they can," Twibell said.

"It's always the law of diminishing returns there – the higher the tax rates go, the more creative people get. Somebody who might have a 401K plan might put a profit-sharing plan on top of it; somebody might look to put a cash balance plan in place. So whatever the [White House] projections are, I doubt they're going to be fulfilled because high income individuals will probably take some action to take full advantage of tax-deferred opportunities," he opined.

One investor who does not fear the possibility of higher taxes is Ed Greenberg, founder and president of Los Angeles-based public relations firm, Edge Communications

A supporter of the president, Greenberg tells Minyanville that he makes his investment decisions on factors other than tax avoidance.

"You don't want to pay any more taxes than necessary, but that's not a motivating strategy. The motivating strategy on a micro- and macroeconomic level is, in my case and age now, to generate some income from investments," shares Greenberg.
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