The U.S. election has not resolved the uncertainty relating to the size of the fiscal drag. The good news is that both political parties are opening the door for bipartisan negotiations to avoid a fiscal cliff. House speaker Boehner even went as far as to say that the Republican party would be willing to accept new tax revenue under the right conditions. In our view, measures that are not deemed to benefit the middle class are likely to fall victim to a deal.
For example, the maximum capital gains could be set to rise from 15% to 20%. Dividends, currently taxed at a 15% rate, would again be taxed at ordinary income tax rates (could be as high as 39.6%). Recall that investors are still benefiting from an 11% YTD positive return on U.S. equities. Given the uncertainty about the outlook for profit growth and potential capital tax increases, the path of least resistance might very well be a wave of “tax-hike” selling.
Having said this, politicians will need to thread carefully on the issue of dividends which have become a key source of income for a large segments of the population, retirees in particular. As today’s Hot Chart shows, dividend gains account for a near record share of disposable income (about 7%).
Beware overtaxing dividends