Narcissists in the national media have made this an issue that mainly affects coastal elites in California, New York and New Jersey, where the top income tax rates are 13.33%, 8.82% and 8.97%, respectively, according to the Tax Foundation. But numerous other states also have high income tax rates, including Idaho (7.4%), Iowa (8.98%), Minnesota (9.85%), Oregon (9.8%), South Carolina (7.0%) and Wisconsin (7.65%). While it’s easy for a New York money manager to move to Florida, as many have, a farmer in Iowa or Wisconsin is chained to his property.
Unlike the 1986 tax reform legislation that effectively transferred wealth from corporations to individuals, the current tax bill appears to do the reverse. The 1986 tax law was deliberated for 13 months before passing; the current bill was slapped together in a few months.
Gundlach told CNBC on December 12 that, while he considers “paying taxes a civic duty,” the current bill looks vindictive in some ways and haphazard in others. He estimates his own taxes will rise 7%, and while he’s not complaining, he wondered whether others in his bracket might change their investing behavior in ways legislators didn’t imagine.
“How many times,” Gundlach asked, “did candidate Trump rail against” the carried interest deduction for hedge fund and private equity firms? It still stands, and even some hedge fund billionaires like Stanley Druckenmiller have labeled it “offensive.”
Other provisions benefit big hedge funds but not small money managers. Leveraged investors are likely to incur higher borrowing costs.
This fiscal stimulus is likely to be front-loaded, with many benefits coming in the first few years. That’s “a double-edged sword,” according to Brian Nick, chief investment strategist at Nuveen.
It runs the risk of causing the economy to overheat and “pulls forward” the next recession. One of his fears is upside surprises to inflation.
“This hasn’t been on the market’s mind for a long time and it’s not baked in,” he says. Still, Nick doesn’t expect a downturn to occur until early in the next decade, when a 20% or 30% correction in stocks could occur.
Like McDonald, Gundlach and many other investment mavens, Nick thinks investors are likely to do better outside the U.S. in the next year. “The eurozone and emerging markets are our favorites,” he says, with the latter being a “better long-term growth play.”
Alan Greenspan and others have long maintained that the real bubble is in bonds, not equities. But while stocks are likely to hold up longer than fixed-income vehicles, they inevitably won’t be immune.