Taking Stock: Municipal bonds may level your tax bill

Dear Mr. Berko:

In several of your columns, you have been telling people to buy tax-free bonds and have even recommended some names. I've been reading your column for more than 30 years, and you have never been bullish of the tax-frees before. I know taxes may go up a little, but not enough for you to go out on a limb and suggest municipals. What gives? Am I missing something?

FL in Oklahoma City, Okla.

Dear FL:

A member of the administration whom I deeply respect tells me that our Health Care Act, along with other government initiatives, may cause the national debt to double in a dozen years. And to the best of my knowledge, Congress has never refused to raise the debt ceiling.

Robert "Little Bobby" Reich, who never held a real job in his life, was an undistinguished secretary of labor in the Clinton administration. And the years before that, as well as the years after, Little Bobby taught classes at Harvard at Brandeis, wrote a bunch of books and became chairman of the UC Berkeley Center for Developing Economies, which seeks solutions to poverty in emerging nations. He's a nice and charming fellow. But he is aggressively advocating a 70-percent marginal tax rate on his blog and covertly encouraged Rep. Jan Schakowsky (D-IL) and 19 other House members to introduce the Fairness in Taxation Act last March. Jan's bill would increase the tax bracket on the wealthy to 45 to 49 percent and tax all dividends and capital gains at that higher rate.

This makes sense for many reasons. 1) These guys recognize that the national debt will never decline. Under the budget proposed by the Administration for 2012, the debt would rise to at least $16 trillion and grow higher in succeeding years. 2) The larger debt will allow government spending (that has averaged l8.2 percent of GDP and now stands over 28 percent of GDP) to reach between 35 and 40 percent of GDP. 3) Members of Congress really believe that they can spend this extra money more effectively than private enterprise, pinpoint pockets of need more quickly and, in the process, significantly reduce economic volatility. And finally: 4) A huge increase in tax revenues will make our representatives more effective as public officials, because they have more funds to distribute among their constituents.

While I don't expect corporate or individual tax rates to rise until after the presidential election, I do think it's a given. And while many of us won't be in the 45-percent or the 70-percent bracket, many of us who used to be taxed at the 20- to 25-percent level may discover in 2013 that our tax brackets have moved up to the 32-percent level or higher. So municipal bonds may be an effective way to level your tax bill. And there are some quality bargains in "Muniland" now, with yields between 5 and 8 percent.

I suggest that you begin nibbling off a few individual issues, some non-leveraged exchange traded funds (ETFs) and tax-free mutual funds -- a few of which were discussed in earlier columns. But don't wait until Congress releases a trial balloon or the print media starts arguing about the wisdom of higher taxes or the Sunday-morning talk shows discusses their pros and cons ... it will be too late. If you wait 'til you hear the mourning sounds of the Moravian Trombone Choir, bond prices will be higher, you will have lost an opportunity for some decent capital gains and your yields will be lower.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Mon, Aug 8, 2011