Goldman Sachs: Investor Taxes Will Rise No Matter Who Wins

Monday, 05 Nov 2012 03:42 PM

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No matter who wins Tuesday's presidential elections, taxes will rise on investment income, Goldman Sachs equities analysts have concluded.

At the end of this year, the Bush-era tax cuts and other tax breaks expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the country sliding back into recession next year if left unchecked by Congress.

Tax hikes include those applied to investment income.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

After the elections are over and lawmakers feel more comfortable dealing with tax and spending issues, both sides of the political aisle will likely agree on a way to steer the country away from the fiscal cliff.

As it stands now, taxes on capital gains and dividends currently set at 15 percent will rise to 23.8 percent and 43.4 percent, respectively, once the fiscal cliff arrives and also when tax hikes embedded in President Barack Obama's Patient Protection and Affordable Care Act take effect next year.

Expect a compromise likely to set tax rates at 23.8 percent for both capital gains and dividends, a deal that cushions the blow to investors but that represents a tax increase nonetheless, the Goldman Sachs team concludes.

"We expect both rates to rise in 2013, but the election outcome will determine details," Goldman Sachs analysts wrote, as reported by Business Insider.

Still, history shows that when taxes applied to the capital gains rise, stock markets fall, as evidenced by a hike of 9 percentage points in 1970 and 8 percentage points in 1987.

Stocks could fall this December.

"In both cases the S&P 500 posted negative returns in the December prior to implementation as investors locked in the lower rate," Goldman Sachs analysts wrote, Business Insider added.

"The market fell 1.9 percent in Dec-69 and 2.8 percent in Dec-86 running counter to trend as December has the second highest average monthly return (1.5 percent) and a 75 percent hit rate since 1928."

Some lawmakers are optimistic that even if New Year's Day comes and goes without a compromise on the fiscal cliff, disaster can still be avoided, likely by punting deadlines for tax hikes or spending cuts.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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