Surprise: investors shifting resources to avoid tax hikes next year

Remember the difference between static and dynamic tax analysis?  The former posits that tax changes produces no change in market behavior, so that hiking taxes by 10% gets you 10% more in revenue.  The latter assumes that changes in tax codes forces markets to adapt, so that rate hikes risk lowering revenues, and lowering rates in certain ways can produce a better revenue stream, especially over the long run.  Republicans favor the latter analytical method, while Democrats insist that tax cuts “cost” revenue opportunities and cause deficits.

Which is correct?  Well, the Washington Post reports on a lot of dynamic activity in advance of the fiscal cliff:

As lawmakers struggle to agree on a plan to avert the series of tax increases looming next year, many investors are taking preemptive action to get out of harm’s way.

Americans are moving to sell investment homes, off-load stocks, expand charitable donations and establish tax-sheltering gifts before the end of the year. Financial advisers and accountants say people are trying to avoid the higher taxes that will take effect in 2013 if Washington does not avert the “fiscal cliff.”

For the nation’s top earners, who as a group make a large share of their incomes through investment returns, those moves could have a major impact on their tax bills.

“We are seeing a lot of questions about what assets to sell,” said Debbie Haines, a partner at CST Group, a Reston accounting firm. “A lot of people are wanting to liquidate stocks that have a gain. A lot of people are harvesting their capital gains. There is also some concern that itemized deductions will be cut, and some people who are charitably inclined are thinking about making bigger donations this year.“

Also, with the tax laws covering gifts set to tighten significantly, several Washington area estate lawyers say they are facing a rush of people interested in establishing trusts that under current law allow a couple to protect more than $10 million in assets from the tax man. Impending changes in the law could reduce the gift exclusion to $1 million for an individual or $2 million for a couple.

Of course, the Washington Post isn’t exactly a newcomer to dynamic analysis.  On Friday, the Associated Press reported that the Post has decided to pay dividends this year instead of next to shield investors from the fiscal cliff:

The Washington Post Co. will pay its 2013 dividends before the end of this year to try to spare investors from anticipated tax increases.

The media and education company said Friday that its dividend of $9.80 per share is payable Dec. 27 to shareholders of record as of Dec. 17. The payout is instead of regular quarterly dividends next year.

Washington Post is the latest company to move up its quarterly payout or issue a special end-of-year payment to protect investors from potentially having to pay higher taxes on dividend income starting in January.

All of this comes in advance of the tax hikes that everyone is pretty sure will be coming.  What will happen when those rate hikes take place — especially on capital gains, which drive later investment?  Investors will be less willing to turn over that capital, since they will pay a higher price in taxes while the risk either remains the same or gets worse on putting the capital into new investments.  The wealthy will seek more shelter rather than investment opportunities.

As the Post reports in its article, the people who don’t have that kind of flexibility are the middle- and working-class earners, whose income comes solely from wages earned by the opportunities driven by risk-taking behavior.  Not only will that mean higher taxes, but fewer opportunities to earn money thanks to the depressing impact of tax hikes, which at the same time won’t deliver the kind of revenues promised by their proponents because of the market-behavior changes that even the Post demonstrates.

Dynamic analysis in this case predicts stasis in the Obamanomics stagnation.