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President Obama’s “higher tax” agenda will now come to fruition, says PIMCO’s Bill Gross, especially if the fiscal cliff is to be averted.
Gross (left), head of the world’s largest bond manager, told CNBC Wednesday that the president’s victory gives him the political capital needed to enact a dividend-tax hike that will cause a substantial drop in stocks.
"Obama ran on a higher-tax agenda," Gross said. "Marginal income taxes go from 35 to 40 (percent), capital gains from 15 to 20, dividends from 15 to who knows what...so they could go high, high and higher."
One likely remedy for revenue-raising will be to take the current dividend tax rate of 15% and hike it five to 10 percentage points, said Gross, whose firm has $1.8 trillion in assets under management.
As the network notes, risk-averse investors prefer dividend stocks, which are common in pensions and mutual funds even though they've largely underperformed other market indexes over the past four years.
Consequently, Gross said, higher dividend taxes would make those companies less attractive and thus take the stock market down 5% to 10%.
That's "the ultimate danger here for the stock market," he said. "Dividends are sheltered in 401(k)s, they're sheltered in pension funds. At the margins investors pay dividend tax rates. To the extent that you raise them from 15 to, say, 25 (percent), that implies in terms of equaling after tax rates another 5% to 10% down in terms of stock prices. We've been very spoiled for the last 10 years."
The election victory gives Obama "a larger bargaining chip" that will force Republicans to accept higher rates, Gross added.
"Certainly we're looking at something higher than 15%, and that's not positive for stocks. On the other hand that's a positive for municipal bonds, which are tax-free," he said. "The stocks that have high dividends, they will be at risk."