Financial Outlook Options

Disclaimer/Preface:
I receive regular emails from my financial group. I didn’t see a disclaimer on reproducing or passing the information they send me along, however I may have to remove this post should a request of such nature materialize.

I felt it interesting and important to share with my readers to get a perspective on what the financial outfits are thinking about the election and its possible outcomes.

I have removed the personal information from it, as well as which firm provided it to me for obvious privacy reasons.

Now, I received this in late June. I sat on this post until now.  I wanted it to be fresh heading into the first debate, which is about domestic policy. Taxes should be a front and center issue. The topic has been turned into a wrestling match with a greased pig, but here are some of the key points to remember:

Obama’s plan (which he won’t detail beyond soaking the rich) claims to cut taxes on the middle class, but we know that to be untrue as Obamacare, the rollback of the payroll tax reduction and the Bush cuts expire in January — aka, Taxamageddon. You can read about the top 5 Obamacare taxes that will hit here and how Obamacare will hit small businesses here.

Obama has repeatedly lied about his tax hikes while pointing to the temporary payroll tax reduction as a ‘tax cut’. It is not. It, like when he begrudgingly extended the Bush cuts, is a temporary reduction. It’s not a cut unless you’re talking about Social Security because that payroll tax reduction eats into the Social Security funding. Once again, Obama engages in class warfare ; “helping” one part of our society while making another one pay for it. (Read – Obama: Thank You For Not Asking About My Tax Hikes on Families Making Less Than $250,000)

Bottom line: This president believes that letting people keep more of their own money is a ‘give-away“. Read about Candidate Obama vs President Obama on his broken tax pledge here. Flashback: Obama tries to sell Buffet Rule as ‘Reagan Rule’ )

 

Romney’s plan is similar to some parts of the path to prosperity budget put out by his running mate, Paul Ryan. (More here on the FY 2013 Budget from Americans for Tax reform) Romney’s plan does not, however, call for tax cuts to those making over 200k. “Therefore, for any married couple with income from other sources above $200,000, all capital gains, dividends, and interest would continue to be subject to current tax rules.” – TPC Tax Topics.

Remember that as Obama tries to employ is class warfare on the topic. Obama will rail Romney wants to cut taxes on the wealthy; that is partly true but Obama will never mention the cuts Romney’s plan entails for those making under 200k, but instead use language like ‘millionaires and billionaires’.

Bottom line: Romney believes people should be able to keep more of what they earn. That in turn creates opportunity to spend more in the economy, save for retirement, save up and start a business or pay for more schooling — you name it. It frees up capital for not just the “rich” but also for the average person. Sounds a lot like Reagan in the 80’s.
Below is the analysis from my financial group. Hope it is of use to you.

 

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Taxation is already a prominent issue in the presidential campaign, and for good reason as Washington has big decisions to make regarding tax rates this year. The debate will get a kick-start this summer when House Republicans vote to extend current rates and look to set the table for an overhaul of the tax code. But we expect final decisions to wait until after the November elections. Our base case scenario for year-end remains an extension of all—or almost all—current tax rates for 6 – 12 months to allow for an attempt at comprehensive tax reform in 2013.

Elections Outcome 1: President Obama wins re-election after just having run on a platform that prominently includes an increase in tax rates for higher-income earners.

The President will feel emboldened, and congressional Republicans will be facing four more years of a Democratic White House. Some leverage will shift to Democrats, but Congress will remain divided. The President will try to quickly negotiate a compromise on tax rates, deficit reduction and the debt limit, but there are only seven full weeks between the election and the end of the year when current tax rates expire. Not wanting to start his second term with a tax increase on every working American, the President could agree to a short-extension of current rates while discussions on tax reform continue into 2013.

It is hard to imagine, however, that the President will not want to achieve at least a symbolic victory on taxes, so we believe he will be able to negotiate either a targeted tax increase on high-income earners, or structure the tax reform debate parameters to ensure that the result is increased revenue, likely through those same taxpayers. We see those earning over $1 million as the most vulnerable to any concession the White House could potentially win in December. Within future tax reform efforts additional high-earning taxpayers could face the prospect of higher effective rates.

Outcome 2:

Mitt Romney wins and Republicans gain a slight advantage in the Senate. Republicans await quasi-control of Washington and plan on their own version of tax reform in early 2013 which would envision reduced income rates coupled with the reduction or elimination of many tax expenditures. These plans still require an extension of current tax rates to avoid a shock to the economy while comprehensive tax reform legislation is developed.

President-elect Romney would not take office of course until mid-January, and the prospect of a failed compromise between President Obama and House Republicans on even a month-long extension of current tax rates seems at least feasible, although we believe unlikely. In this scenario, Republicans would make clear that they intend a retroactive fix for the tax rates within the first few weeks of the new Administration, but that process could be unsettling. In this scenario, Republicans will still need to wrestle with only nominal control of the Senate and the process of extending all tax rates may take longer than expected.

 

Longer Term

One common goal of both parties in Washington, at least ostensibly, is to reform the tax code. Republicans, including Mitt Romney, would like to link corporate and individual reforms, reducing top rates for both to around 25% while limiting exemptions and deductions. The White House also supports tax reform with a goal of a 28% top rate for most corporations, also by scaling-back deductions and exemptions and expanding the corporate rate to include many pass-through entities. The President supports current tax rates for most individuals but tax increases for those earning in excess of $200,000 ($250,000 for joint filers).

 

Under any election scenario, partisan gridlock and inaction is likely to persist at some level on Capitol Hill, and while the prospect of an expiration of all current tax rates may be small, it is real. The impact of allowing current laws, including across-the-board tax increases, to take effect would be felt in the economy, and according to the Congressional Budget Office would result in a 1.3% contraction and at least a short-term “recession1” in 2013.


Tax reform is an area where many Democrats and Republicans have the shared goal of simplifying the tax code and reducing many tax preferences for individuals and corporations. We expect this to be an area of serious debate next year and one that could see significant results along the lines mentioned above. It is impossible to predict what specific rates will be, but in general higher-income earners face more risk of increased effective tax rates than other taxpayers. In general, the deductions and exemptions that tend to be utilized by higher-income earners in greater proportion than other taxpayers will be the first examined for removal from the tax code to offset revenue lost by lowering income rates.

Potential Tax Ranges for Higher-income Individuals

  Current  No Agreement  Obama  Romney
Income  35%  39.6%  35 –39.6%  25 –35%
Capital Gains  15%  20%  15 –30%2  15%
Dividends  15%  39.6%  15 –39.6%  15%
Estate and Gift
    Exemption  $5.12 million  $1 million  $3.5 – 5.12 million  $5.12 million
    Rate  35%  55%  35 – 45%  0 – 35%
Health Care Surtax on Investments  0  3.8%  3.8%  0 – 3.8%

1 Congressional Budget Office, May 2012, “Economic Effects of Reducing the Fiscal Restraint that is Scheduled to Occur in 2013”
2 “Buffett Rule” would result in an effective minimum rate of 30%

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About A.P. Dillon

A.P. Dillon is a freelance journalist and is currently writing at The North State Journal. She resides in the Triangle area of North Carolina. Find her on Twitter: @APDillon_
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