For those who believe lowering the highest federal income tax rates will result in a positive outcome for anyone except those that directly benefit from lower rates, please consider the following:
Tax-free municipal bonds are issued by states, cities, and municipal entities of all varieties to procure funding to build schools, roads, water, sewer and electric systems, bridges, airports, buildings, etc.
Because these bonds offer investors interest payments that require no federal income tax and in selective situations, no state income tax be paid, the interest they give investors need not be as high as similar quality taxable bonds.
Investors generally compare the interest rate offered by the tax-free bond to the after-tax rate offered by the taxable bond.
Let us assume the tax-free bond pays 4 percent interest, the taxable bond pays 5 percent interest and the prospective bond-buyer is in a theoretical 40 percent overall tax-bracket. Taxing 40 percent of a 5 percent bond leaves the investor 3 percent after taxes are rendered. The tax-free 4 percent interest-paying bond is the higher yielding investment in this example.
Now, run the numbers after dropping the tax rate for our highest-earning citizens and it will be apparent that the tax-free bond interest isn't as attractive.
To become as attractive and competitive as when the highest income tax rates were higher, new tax-free bond offerings need to be issued paying higher interest.
Who will pay the now higher interest on the municipal bond? Everyone who pays local taxes.
To give the wealthiest among us an income tax-rate reduction absolutely ends up costing that vast majority more. It's just a matter of how much.
John Parry, Fort Pierce