August 6, 2010

Merrill Lynch Webcast Panelists: Expect Rise in U.S. Taxes

Wealthier taxpayers, not corporations, likely to bear the burden, say members of a panel hosted by BofA's Merrill Lynch.

Merrill Lynch Wealth Management assembed a panel of experts for a Webcast late last month, to discuss why they believe taxes will rise, what form these increases are likely to take and how higher rates may affect taxpayers.

The panelists for the Webcast "Preparing for Higher Taxes" were:

? Sallie Krawcheck, president of global wealth and investment management at Bank of America;

? Harold Ford Jr., executive vice chairman for global banking and wealth management at Bank of America Merrill Lynch and former Congressman from Tennessee;

? Andrew Friedman, tax expert and former partner at Covington & Burling;

? Megan McArdle, business and economics editor of The Atlantic; and

? David Bianco, head of U.S. equity strategy, BofA Merrill Lynch Global Research

Many industry, tax, and policy experts believe that rising taxes are all but inevitable. Krawcheck cited several reasons. "The U.S. budget deficit has soared to record levels and is projected to top well over a trillion dollars in 2010 for the second year in a row... And that most likely means that many of the tax cuts enacted earlier in the decade will be allowed to expire at year-end. The White House has signaled that it's not interested in raising corporate tax rates, meaning that much of the burden could fall on the U.S. household, and primarily on Americans in the higher tax brackets."

The panelists agreed that taxes would rise. Bianco said the biggest threat to the U.S. economy, given that it is highly levered, is a surge in interest rates. "It's important that we take actions to convince the bond market we're going to, maybe not solve, but improve the situation. And that's why I think all of us were saying, there's going to be higher taxes, but we also have to find areas to cut back on spending."

Ford said it was likely the Obama administration would face political pressures "to slow the rise in light of where the economy is, where the job market is today." He said he also expected to see spending cuts: "I think there's a desire to curb long-term spending."

Asked to explain what will happen if 2001 and 2003 tax cuts expire this year as scheduled, Friedman said that the ordinary income rate, the top rate, will jump from 35% to 39.6%. "Those will be on affluent families... and all the rates below that will similarly rise a bit." In addition, he said, the capital gains tax rate would go from 15% to 20% on an asset held for more than a year. And the dividend tax rate, currently 15%, would skyrocket to the ordinary income tax rate of 39.6%, "so instead of having dividends taxed by capital gains, as they are now, they would be taxed as ordinary income, so it's a severe hit."

Ford said that Democrats might consider extending the rates for capital gains, dividends and possibly middle-income rates. "If I were a betting man, I'd say that top rate is definitely going up... it's likely that Democrats will agree to some compromise before the election."

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