Wednesday, December 8, 2010

New Fiscal Agreement: Mostly Good News for Investors

The Big News yesterday in the financial world was the agreement that President Obama and Congress reached on taxes.

Stocks rallied sharply in the aftermath of the announcement, but then sold off in the afternoon to end the day basically flat. Bonds, meanwhile, are getting killed, both in the taxable and municipal areas. At this writing, the 10 year US Treasury is yielding 3.25%, which is up almost 80 basis points from two months ago, as the overall package is apparently viewed not only as pro-growth but also will increase the budget deficit and could potentially stir inflationary pressures.

I won't get into whether this current political compromise is healthy for the longer term - you and I will be reading lots of analysis on this question in the weeks ahead. Instead, I wanted to highlight a couple of things that are pretty good news for investors in these recent developments.

Here's an excerpt from Barron's on-line today (I have added a couple of highlights):

Notwithstanding how it was being played in the media, there was no "extension of the Bush tax cuts" in the deal made by Obama with Congressional Republicans. The tax-rate increases slated to take effect on Jan. 1 were staved off for two years, as most forecasters had assumed would happen. So, no surprise there.

For investors, the favorable 15% tax rates for long-term capital gains and qualified dividends also were extended. In addition, the proposed bipartisan calls for the estate tax to resume at 35% with a $5 million exclusion on Jan. 1, instead of the 55% rate on estates over $1 million, as current law calls for.

The other key parts of the deal were a one-year, two-percentage-point reduction in Social Security withholding taxes (FICA on your pay stub) and a 13-month extension of emergency unemployment benefits. Both are designed to spur the economy by increasing the tax-home pay of those who work and maintain spending by those who aren't.

The news on estate taxes was better than I expected, frankly, since this benefit only helps those at the very highest wealth levels, but the Republican view carried the day.

Higher Interest Rates Could Offset Obama Tax Deal -