Wall Street: Say Goodbye to the Bush Tax Cuts

Goldman Sachs thinks marginal income, cap gains, and dividend rates are all headed higher.

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Are taxes going up? Goldman Sachs sure thinks so. Here are some key takeaways and predictions from a brand-new political analysis by the investment firm:

1) [After the 2008 elections], there will be Democratic majorities in Congress of roughly 55 seats (counting independents) in the Senate and roughly 240 seats in the House, up from 51 and 232 today. ... [Our] working assumption is that Hillary Clinton is more likely to win the White House than any other candidate.

2) Marginal tax rates on high-income earners are likely to increase...through a combination of allowing the 33 percent and 35 percent brackets to revert back to 36 percent and 39.6 percent respectively, and increasing the rate paid under the alternative minimum tax for higher income earners, which is currently set at 28 percent.

3) The tax rate on dividends is likely to rise. In 2005, congressional Republicans barely managed to pass a two-year extension of the 15 percent rate on qualified dividends and capital gains enacted in 2003. ... If Hillary Clinton or Barack Obama wins the presidency, extending the dividend tax rate is likely to be near the bottom of tax priorities.

4) The capital gains rate will rise as well, but may be lower than the dividend rate once again. The long term capital gains rate looks likely to rise from its current level of 15 percent. ... An increase past 20 percent is possible but less likely. If it were to increase further, the next natural stop would be 28 percent, which was the rate that applied to long term capital gains before President Clinton and Congress agreed to lower it in 1997.

5) Tax changes could become effective in 2009, but are more likely in 2010 or 2011. Although it seems fairly clear that an all-Democratic government is likely to let some of the expiring tax rates expire, it is much less clear that they will proactively raise tax rates before they are scheduled to reset at the end of 2010. ... An effective date in 2009 seems unlikely, since a retroactive tax hike would be largely though not entirely without precedent. ... A tax hike in 2010 is more likely, but could also present political problems. If Democrats sweep the House, Senate, and White House, as seems possible, history indicates that they may face a difficult midterm election in 2010. A tax hike in 2009 or 2010 could sit well politically with a portion of the Democratic base, but would be unpopular with most Republicans and many independents.

2008 presidential election

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