Beyond the rhetoric and posturing in Washington, what does the fiscal cliff mean for investors?
The phrase is usually accompanied by dire warnings about what will happen to the nation's economy if the country fails to avert the fiscal cliff.
Even talk about a possible compromise has sent shivers up investors' spines.
One compromise would cap the tax exemption on municipal bonds – a tax break in effect since 1913. That has sent investors in that segment of the bond market scurrying for cover.
The compromise would also raise borrowing costs for municipalities.
As Mike Nicholas, CEO of the Bond Dealers of America, told CNBC, "It's a tax on everyone."
Another more likely part of any compromise would involve raising the capital gains tax rate from the current 15% to perhaps 25% or more.
That prospect affected many high-flying stocks, including Apple Inc. (Nasdaq: AAPL), in which investors have large capital gains. Investors are selling Apple and other stocks before year's end to lock in the lower capital gains tax rate.
Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank in San Francisco, told Reuters, "You're going to see selling in the likes of Apple and other companies that have had good runs."
Fiscal Cliff Deal Likely to Affect All Americans
But the fiscal cliff and whatever compromise politicians work out will likely affect all U.S. citizens, whether they're investors or not.
That point was brought home recently in an article by Money Morning Chief Investment Strategist Keith Fitz-Gerald. Despite the political rhetoric, there is a good chance taxes will be going up for everyone.
According to the non-partisan Tax Foundation, the average middle-class tax rate is already 43.12%. Quoting FOX Business Network's Gerri Willis, Fitz-Gerald says taxes on the middle-class could jump to nearly 50%, including federal and state taxes.
Barring congressional action, the fiscal cliff would mean more than $600 billion worth of annual tax increases and spending cuts.
The middle-class federal income tax rate could jump from 25% to 28%. Add to that the rise in payroll taxes from 13.3% to 15.3%.
How Much Would Higher Taxes Cost You?
To find out how higher taxes would affect you, you can check out easy-to-use online calculating tools, including one from the Tax Foundation.
All it requires is for you to fill in your income and your tax filing status. It then shows you what your tax bill will be if U.S. President Barack Obama and Congress don't work out a compromise and the country goes over the fiscal cliff.
Not everyone thinks the fiscal cliff should be avoided. In fact, some people – like Peter Schiff – think it could be good for the U.S. economy. Check out Schiff's fiscal cliff comments here.
Related Articles and News:
- Money Morning:
The Fiscal Cliff Is Set to Clobber the Middle Class With Nearly 50% Tax Rates
What Will the Fiscal Cliff Cost You? There's a Tool for That
Even Muni Bonds May Be Targeted in Fiscal Cliff Talks
High-Flying Apple Falls to Earth as Investors Fret Over Taxes