During the month of June, I traveled to Washington D.C. twice. In both the affluent suburbs and the District of Columbia itself, the opulence created by cozy relationships between the business community and federal government is evident everywhere. In Bethesda, MD, where I stayed during one of my trips, the number of quality restaurants in a small area can rival that of any major city. Apparently, in Washington anyway, big government means big business
As a nation, we are in the midst of monumental economic changes. Large government budget deficits are again threatening the growth of our economy. The chaotic conditions in the credit markets are further hampering our ability to grow as lending activity grinds to a halt. At a time when cooperation is imperative to address and resolve these economic maladies, the lack of bipartisan action in Washington is appalling. While Democrats point their fingers at oil companies and speculators as the reason behind the escalating price of oil, Republicans take an “I told you so” attitude and promote offshore drilling. Special interests by both parties in the housing industry have contributed to possible solvency issues facing Fannie Mae and Freddy Mac that may result in yet another taxpayer bailout. Is it any wonder that a recent poll indicated that Congress received a 9% approval rating?
Whether we like it or not, fundamental change is imminent. After refusing to ratify and abide by the terms of the Kyoto Treaty, the Bush administration has begrudgingly begun to adhere to the will of the public and adopt a slightly more environmentally friendly position. Proposals such as universal healthcare and middle class tax cuts are designed to assist the shrinking middle class, so important to the survival and long-term stability of the American economy. And despite finger pointing at our trading partners for job loss in America, most objective citizens recognize that a quality education, not restrictive treaties, is the formula for a vibrant economy in America that creates quality high-paying jobs.
In my opinion, this upcoming presidential election presents two qualified candidates with different visions for America. While both candidates place a much higher priority on environmental concerns than the current administration, the similarities end there. Different approaches to Iraq, fiscal policy, health care and foreign policy are significant issues and voters will need to carefully consider each candidate's plan and assess their chances for success.
It is apparent that taxes will undergo significant changes no matter who wins the presidency. Of greater significance may be the fact that the majority of the Bush tax legislation, passed during his first term, is set to expire at the end of 2010. These so-called sunset provisions make it a certainty that the tax on long term capital gains and qualified dividends will be on the legislative docket. Obama has made it clear that he intends to raise the long-term capital gains tax, probably back to 28%, almost double the current rate. He is also an advocate of increasing income taxes for taxpayers who earn more than $250,000.
While McCain favors maintaining the Bush tax cuts, he may have little choice in raising income taxes should the Democrats retain control of Congress. Under a McCain presidency, it is unlikely that spending would continue at the same exorbitant rate. With former senator Phil Gramm as one of his chief economic advisers, McCain is likely to concentrate efforts on balancing the budget and applying a strategic mix of fiscal policy to boost the economy.
Even if tax legislation is passed in mid-year, provisions are often included to make it effective retroactive to the beginning of the year. As a result, proactive tax planning that assumes a December 31, 2008 effective date may be the proper course of action.
It has been a long time since the United States has been faced with this degree of economic uncertainty. Regardless of the outcome of the presidential race it seems likely that some taxes will rise. As such, tax preferred investments such as municipal bonds would seem to represent an attractive opportunity. Meanwhile, the combination of a bear stock market and a possible increase in the tax rate for long term capital gains creates some attractive planning opportunities. By offsetting long term capital gains and losses, portfolios may be repositioned and balanced with little or no tax liability. Furthermore, if 15% long term capital losses are carried forward for use in future tax years, it is possible they can be used to offset long term capital gains taxed at higher rates ranging between 20%-28%.
Change is in the air, and while no one can be sure of its direction, some conclusions appear to be self-evident. Stay tuned.
Enjoy your summer,
Clifford L. Caplan, CFP®
In The News: In an article titled “A Solid Financial Planner Can Be Money In The Bank” that appeared in the May 23rd edition of the Boston Business Journal, I was interviewed regarding the criteria that an individual should consider when choosing a financial planner.