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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?

"There are so many other things that enter into an investment decision. If you look at a corporate bond versus a muni bond, you say, ok, the return is lower on the muni, but you're getting tax relief, so it's equivalent." he elaborated.

"I may not be in that bracket where taxes are such a burden that I have to do anything extraordinary to change my behavior – some people are concerned about estate and capital gains taxes – but my view is that the country needs to raise revenue and the best way to do it is for people who can afford it to pay their fair share. It's a civic responsibility," explains Greenberg on how he sees the tax situation.

Greenberg highlights the example of his home state, California, where voters passed Proposition 30, which aims to resolve the state's budget deficit by raising taxes fractionally on higher-income residents. Conservatives have claimed that Prop 30 would drive millionaires out of California, but Greenberg points out that a recent Stanford study found that the last big tax hike in 2005 did not result in an increase in out-migration of people with incomes over $1 million. He added that he believed that tax rates do affect economic behavior, but that they had yet to reach levels where they would do so.

Twibell also points out that there is uncertainty regarding transferring money into tax-exempt municipals. "One of the things that hasn't been discussed very much is that under the president's tax proposal, there would be a cap on the ability of high-income individuals to take advantage of tax-free interest on municipal bonds. The number floats, but it's somewhere around 28%. [Municipals] are not necessarily the best places to be going right now until that issue gets resolved," explained Twibell.

Regardless of the effectiveness of moving from stocks to municipals in escaping taxes, would such a change in investment strategy, if implemented by a large number of investors, hurt the economy? Twibell said that there is no definitive answer.

"Just shifting from a corporate bond to a municipal bond really doesn't have a huge impact on the economy; it probably drives financing costs up a little bit for corporations, but [it also] considerably reduces them for municipalities," said Twibell, who also offers a hypothetical scenario.

"Let's say you run a business and you're making a certain amount of income and your taxes are going to go up. So rather than making that income and maybe reinvesting it back into your business, you take that money and you put it into a 401K plan. That's money that might otherwise go into consumption or your business or pay bonuses for employees.

"That income now goes into mutual funds that invest in corporations – well, there are some benefits to that. That's not in itself a negative. But it does potentially reduce the growth of your business or income available to your employees. So there is a consequence to that. It is not all bad, but you could argue that we need both investment and spending and economic growth. But right now, we probably need more economic growth than we need money going into the stock market. I think that's when the tradeoff comes in," Twibell said.

Because of the cloud of uncertainty still swarming around the issue of the fiscal cliff, Mag Black-Scott, chief executive of Beverly Hills Wealth Management, advised investors against making hasty decisions. "Any time you make a decision purely for tax reasons, it has a way of coming back and biting you," she said, according to the Times.

"Could you be at a 43% tax on dividends instead of 15%? The straight answer is yes, of course you could. But what if that doesn't happen? What if they increase just slightly?" she pointed out.

For him to tell his clients that it is safe to invest in equities, Twibell said he needs to see the White House and Congress quickly work out a deal on tax hikes and spending cuts so that there is clarity.

"Let's say the capital gains tax rate went from 15% to 16% -- that's very unlikely, but let's just say it did. That's pretty minimal and shouldn't drive investment decisions. But the capital gains tax rate going from 15% to 25% probably does. So even if tax rates go up, I can see a scenario where we might advise clients not to worry too much about tax hikes. But that's the problem when you don't have clarity: You assume the worst," explained Twibell.

"With the lack of certainty, I think we've got to err on the side of caution and for [my firm], that'd be to continue to advise our clients to do all the things possible to try to reduce their taxable income for next year."

Twitter: @sterlingwong
No positions in stocks mentioned.
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