Obama “Jobs” Bill To Hit Municipal Bonds : Stop The ACLU

by William Teach

What do municipal bonds have to do with Obama’s American Jobs Act? Well, according to Barron’s

Municipal bonds have always been synonymous with tax-free income. That would end if President Obama gets his way.Under the jobs bill the President sent to Congress Monday, high-income individuals and families would no longer receive interest from state and municipal bonds free completely from federal income taxes, beginning in 2013. The legislation would also reduce the value of tax deductions for taxpayers in the highest bracket.

Kind of a back door tax increase designed to pay for his $447 billion spending bill as we go down the road. It’s sure not paid for now.

As a result, upper-income investors would suffer the dual blow of lower after-tax income and capital losses from their muni-bond portfolios.That could severe repercussions for the muni market, which only in recent months has recovered from the so-far errant prediction of hundreds of defaults totaling billions of dollars from analyst Meredith Whitney.

“In my opinion, this will have a negative effect on the muni market and could start another wave of heavy withdrawals from muni-bond funds, even though many investors in these funds will be minimally affected,” says Ken Woods, who head Asset Preservation Advisors, an Atlanta manager of bond portfolios specializing in high-net-worth individuals. “The muni investor’s thought process will be, ‘the government’s next step could be the complete elimination of the [tax] exemption.’”

So, those evil rich people would not invest as much in municipal bonds, and could pull some of their money out. Which means there would actually be less money raised from the taxation change. Wow, good plan, Mr. Obama!

 
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