Everybody shops for a good deal. This is true of investments as it is for stereos and groceries. When interest rates are low and risk abounds in the stock market (Facebook IPO falls flat, without Apple the S&P 500 is flat) those looking for a cautious investment strategy wisely look to tax free municipal bonds. Investors are happy and the issuing municipalities are happy. Yet a problem arises. It's mostly institutional investors and the wealthy (i.e. millionaires) that invest in these tax free municipal bonds. Yet there is a cry for millionaires to pay more in tax. The only way to achieve that is to close loopholes such as allowing muni bonds to be tax free. This would undermine the municipalities at a time when many of them are teetering on the brink of insolvency.
What makes matters worse is that when used for political purposes few make the distinction between people with a net worth exceeding one million dollars and those who are earning an annual income in excess of that amount. Those are two very different things. In either case it's entirely possible for those people to invest in instruments that are deemed tax free, tax exempt, or tax deferred. These instruments allow the government to more easily attract investment capital without having to pay a higher rate. It's an unfair advantage in that regard, but one we shouldn't begrudge them, in my opinion.
So we have yet again an instance of planners undermining their own efforts. Those who seek reinvestment in urban areas are decrying, although most likely unbeknownst to them, the very vehicle used to raise the capital required to do so. They seek to close the loopholes that allow millionaires to avoid paying tax. Yet these very loopholes were designed to attract capital for infrastructure investment from the evil millionaires who, by investing in these bonds, are seeking returns that will simply keep pace with inflation which is typically part of a larger capital preservation strategy.
The US has suffered under a capital strike before. It would be worthwhile for those interested in learning how this happens -- and what to expect in the not too distant future -- to find out when that was, who was president, and how we got out of the situation.
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