As anxious investors assess their portfolios in light of expected tax increases on investment income, hedge fund manager Douglas Kass has a simple message: Relax.
Mr. Kass, the founder of Seabreeze Partners Management, thinks much of the investing world has overestimated how hard the markets and investors would be hit if tax rates on dividends and capital gains rise at the end of the year, as the White House has proposed.
Mr. Kass can look for support to several economists who have studied past changes in tax rates and found that the shifts had less of an impact on investor behavior than was initially expected.
That’s largely because a dwindling number of investors are subject to the taxes on investment gains that are set to rise at the end of the year, with most stocks held in accounts that are exempt from taxes.
For example, only 14.7 percent of American households have mutual funds in taxable accounts, down from as high as 23.9 percent in 2001, according to data from the Investment Company Institute.
Douglas A. Shackelford, an economist who has examined the 2003 legislation that lowered the tax rates on capital gains and dividends, said that when those changes were being put in place “people thought this would be revolutionary,” setting off a wave of changes in the way companies rewarded their investors, and how investors evaluated companies.
In the end, “it made a difference, but it certainly was not revolutionary,” said Mr. Shackelford, a professor of taxation at the University of North Carolina’s business school. The limited number of investors who were subject to the changes in 2003 has grown even smaller today, he said.
While data on the tax status of all stockholders is hard to come by, many economists agree than an increasing proportion of the entire equities market is now held by retirement investors whose holdings are not subject to current tax law; by foreign investors who don’t pay American taxes, or by institutional investors like insurance companies and pension funds that are exempt from taxes.
So Obama is going to tax certain investments that fewer people are going to use to avoid the taxes. That makes sense.