TCS Daily

The Return of the Tax-Shelter President

By Jerry Bowyer - July 28, 2009 12:00 AM

Investors aren't sheep; they're more like cheetahs. And there may be no species of investor more cheetah-like than the American investor.

The latest case in point: municipal bonds.

Munies are securities issued by state and local governments (and related entities) as a means of borrowing money for long-term projects. As a general rule, investors are not required to pay taxes on the interest earned from munies. Therefore, this particular investment is a kind of tax hedge, or tax shelter. When tax rates rise (or threaten to), tax-free investments become more desirable, and munies become more prized.

So it's no wonder that municipal bonds have done very well under President Obama. His inauguration speech alone triggered one of the greatest munie-bond rallies in history. And in recent weeks, his all-out push for nationalized health care drove investors to bid munies to new highs.

But again, these are cheetahs we're talking about — quick and agile. As the political fortunes for nationalized health care turned south in recent days, investors pulled back from munies. These shifts used to take longer to establish, back when trades involved calls to brokers and lots of paperwork. But now all of this is a mouse click away. It takes me about a minute to place a broad bet on, or against, the municipal-bond market.

Alas, tax rates are going up — nationalized health care or not. And we now know for certain how cheetah-like American investors will respond. They will continue to put their money in munies and various other tax-favored real-estate developments. They also will stash their cash in complicated and irrevocable trusts that are not worth the trouble when the top income-tax rate is 35 percent, but will become eminently reasonable when that rate hits 50 percent. Right now, the smartest lawyers and accountants in the country are dreaming up incredibly complex strategies to shelter their clients from Obama's millionaire surtax. And protected they will be, although the broad result will be economic stagnancy as investment capital goes on strike.

With all the disruptions in the credit markets, it may be a while before we build houses like we used to. But we're going to witness a boom in shelters all the same — tax shelters. Investors simply won't stand and wait to be sheared by the tax man. They won't turn into sheep. It was the story of the 1970s when Jimmy Carter was president, and it's going to be the story for as long as Obama and his high-tax, big-government policies are in place.

Call it the return of the tax-shelter president.

Jerry Bowyer is an economist, CNBC contributor, and author of the upcoming Free Market Capitalist's Survival Guide.
This article first appeared on National Review Online.

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