Outlook for Tax Rates

As usual, this isn’t a terribly unique insight, but we do think that tax rates are headed higher.  In economics courses, a common Latin phrase was ceteris parabis, or all else equal, which it never is.  Still, ceteris parabis, that should make municipal bonds a great investment for those in the higher marginal tax brackets.

One concern I have is that the government, in an effort to increase tax revenues–aside from raising taxes–might make tax-exempt bonds less tax exempt.  In other words, Uncle Sam could pull the rug out from under municipal bond investors by saying–PRESTO–your bonds are 50% tax exempt, for example.  I think, though, that they might be doing it another way, and that’s by drying up the supply of municipal bonds by helping municipalities achieve a lower net interest cost another way, by supporting Build America Bonds (BAB), taxable municipal bonds that have been hugely popular.  Still, so long as tax-exempt munis aren’t made less tax exempt, the BAB phenomenon should only make existing bonds more valuable and lower the rates of new issues.

All that aside, and back to the original sentence, here’s a cool chart that puts some history behind the idea that tax rates could head higher.  This chart, from dshort.com, shows the history of marginal tax brackets, their number and tax rate, going back to the beginning of the 20th century.  It shows that there’s a lot of room to the upside for tax brackets.

This is from the excellent website dshort.com.

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