by Lawrence Meyers | June 25, 2012 1:29 pm
This article isn’t about whether Obamacare is good or bad for the nation’s health care crisis. It’s about the heavy load of taxes that will hit Americans if the Affordable Care Act doesn’t get repealed or overturned. The bottom line is that these taxes are going to be really, really bad for the economy and for your portfolio. Here’s a look at how just a few of them will cause pain.
The first tax is a surtax on investment income. Beginning next year, long-term capital gains would be taxed at 23.8% instead of 15%. Dividends would be taxed at 43.4% instead of 15%, as would short-term capital gains. These tax hike apply to households making more than $250,000 and individuals making more than $200,000.
The hike in the dividend rate is especially troubling. Many investors put funds into stocks that pay dividends because these companies are generally large global brand names that are considered relatively safe. The dividends provide an extra measure of safety, particularly against inflation. Many older Americans rely on dividend and other income investing as a way to make up for the losses inflicted by inflation.
The result is that dividend investing will be totally undermined, causing individuals and wealth managers to reallocate their portfolios. The stocks of these large-cap names may take a significant blow as investors rotate out of them. My guess is they’ll transfer into preferred stocks or high-yield bonds. Thus, you may want to consider getting out of large-cap names that are riding high P/E’s, like Proctor & Gamble (NYSE:PG), Pfizer (NYSE:PFE), McDonald’s (NYSE:MCD), Merck (NYSE:MRK) and AT&T (NYSE:T). Consequently, it could make sense to rotate into the iShares S&P U.S. Preferred Stock Index ETF (NYSE:PFF) and Ashford Hospitality Trust Preferred D Series (NYSE:AHT).
The other possibility is that these companies will boost their dividends to blunt some of this damage. That would leave them with less capital to reinvest in their business, continue growing and thus hire more people for that growth. That hurts the economy.
Second, the Medicare Payroll Tax will be boosted from 2.9% to 3.8% at the same income thresholds mentioned above. The result is that people in these brackets will have less money to spend and/or put toward investment. The impact will be $900 per $100,000 earned, so that money ends up in government hands rather than the economy. It’s hard to say exactly where this money won’t get spent, but I’d think luxury retailers will be potentially vulnerable. So, look to get out of stocks like Tiffany (NYSE:TIF) and Ralph Lauren (NYSE:RL).
And third is the real killer — the Individual Mandate Excise Tax, which hits anyone who does not buy health insurance. So let’s say you have X dollars of discretionary income in 2012. Beginning in 2014, you will have to spend a portion of X on health insurance or pay the excise tax. Once again, that’s money that gets lifted out of discretionary expenditures.
However, unlike the Medicare increase that hits only upper-income people, this one hits everybody. That will suck a lot of money out of the economy. I think in this case, you’re looking at a hit to consumer-discretionary stocks, so I’d look at shorting the Consumer Discretionary ETF (NYSE:XLY) and the PowerShares S&P SmallCap Consumer Discretionary Portfolio (NASDAQ:PSCD), as smaller companies are more likely to get hurt.
These are only three of the 18 taxes headed our way unless Obamacare gets repealed or overturned. Act accordingly!
The opinions contained in this column are solely those of the writer.
Lawrence Meyers holds Ashford Hospitality Trust Preferred Series D. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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