Broker Check

September 17, 2008

Election Commentary on the Health of Your Wealth

            More than any other election that I can remember, this one is about tax rates. Depending upon who the next president will be will determine the rate you pay taxes, how much more you will pay and what kind of investments you might have, which types of investments might do more poorly than others and what strategies may be pursued to preserve one’s wealth.

            Let me begin with a review of our current tax landscape. President Bush’s tax cuts are set to expire on December 3, 2010. If they do, personal income tax rates will rise on all taxpayers. The average person making $50,000 per year will pay approximately $2,200 in additional income taxes. The top dividend tax rate will go from 15% to the same ordinary income tax rate paid by the taxpayer; the top capital gains rate will go from 15% to 20%. The estate tax will decrease from its current 45% rate to 0% in 2010 and increase to 55% on January 1, 2011.

            Let’s look at what may happen to the above mentioned taxes depending upon which candidate becomes President.

            The current top rate is 35%. If nothing is done and the Bush tax cuts expire, the tax rates will increase by 3-4% with the top rate reverting to 39.6%. John McCain wants to keep the personal income tax rates in place while Barack Obama wants to increase them to 40% and has suggested he would support a 50% tax rate as suggested by Congressman Charles Rangel, the Chairman of the House Way and Means Committee (need I say that Congress will probably remain with a Democrat majority).

            The current top dividend tax rate is 15%. Under Obama, the top dividend tax rate would rise to between 40% and 50% as well. Under McCain, the top dividend rate would remain at 15%. Since the tax rate on dividends were lowered in 2002, companies have increased or started dividend payouts, thereby benefitting specific investors and the stock market in general (most individuals receiving pensions ultimately benefit because it is equities that secure most pensions).

            The current top rate for long term capital gains taxes is 15%. Under Obama, the long term capital gains rate is likely to rise to 28%, a doubling. McCain proposes to permanently keep the top level at 15%. If Obama wins, and you have large built in capital gains and are considering recognizing those gains in the next several years, then it may pay for you to consider selling by December 31, 2008. It may not be wise to wait and see if an Obama presidency, together with a Democrat Congressional majority, waits until 2011 or instead chooses to act in 2009 to raise the capital gains rates in order to pay for the proposed spending programs.
            On top of all these taxes, Obama proposes a new social security payroll tax on “top earners” of 2% to 4%. McCain has stated he will not raise social security taxes.

Women Hurt

            An interesting side rate is the effect of the Obama/Rangel tax policy on women. The Obama/Rangle tax policy could raise tax rates on a couple to 72.148% (50% ordinary tax rate plus 11.65% social security plus New York State taxes of 6.85% plus New York City taxes of 3.648%). This amounts to a declaration of war on two-income families, a marriage penalty of punitive proportions. If the second earner, who in many cases is the woman is going to have to give 72.148% of which she earns to the government, she might rationally come to the conclusion she should stay at home with the children! Dr. Bob Froehlich, DWS Investments Newsletter 8/12/08, The New York Sun 8/14/08 pg.6

New York Hurt

            According to the Manhattan Institute think tank, Obama’s tax increase will hit a handful of states harder than other states. Thanks to New York City’s heavy concentration of wealth and the second largest share of filers earning more than $200,000, a total of 3 billion will be siphoned out of New York in order to subsidize the residents of other states. When rates rise sharply, taxpayers respond by working and earning less and by choosing from a wide variety of legal strategies for shifting or sheltering income in tax exempt investments. Relying upon a statistical model used by the U.S. Treasury Department, the Institute says wealthy New York taxpayers by enacting these strategies will reduce New York State coffers by approximately 900 million in 2009 and 2010; coming at a time when New York State is saddled with 5.4 billion deficit in the next fiscal year. Obama’s federal tax proposal comes as Governor Paterson and Mayor Bloomberg are considering raising state and local taxes as a last resort measure to cope with deficits that may expand further in the wake of the Wall Street crisis. New York Sun 9/17/08 pg. 1

            If you have any questions as to how this law or other tax matters may pertain to you, please call us. If you want to read more, visit the AOHL Newsletter Archives at

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