How much of a difference will the choice of the next US president mean for your wallet? When it comes to the economy, unemployment, the stock market and the taxes you pay, in some ways it will make a big difference whether President Barack Obama or former Massachusetts governor Mitt Romney is elected…but in other ways it will matter very little.
We asked Gregory Valliere, a leading consultant on how federal policies affect financial markets, to share his insights about what is likely to happen if Romney is elected or President Obama is reelected—given the realities of Washington politics—and what our readers can do to adjust their financial planning and thinking…
GRIDLOCK VS. COMPROMISE
No matter who wins the election, the enormous federal debt and continued huge budget deficits almost surely will stand in the way of any ambitious new government spending, big new tax breaks or other stimulus measures that presidents often rely on to influence economic trends. That’s especially true because of the fierce partisan fighting that will continue between Democrats and Republicans, even if Republicans keep control of the House, which is likely, and gain control of the Senate, which still is a toss-up.
A wild card: No matter which candidate becomes president, the course of the European debt crisis will profoundly influence the US economy and stock market…and a US president would have limited influence except for urging European leaders to take action.
How key issues are likely to be affected by the presidential election, depending on who wins…
Bush-era tax cuts from the early 2000s are due to expire at the end of 2012, which would mean higher taxes on your income. Also, a temporary cut in the Social Security payroll tax is due to expire.
If Romney is elected: The current income tax cuts are likely to be extended for several more years, even though Democrats have pushed for higher taxes on high earners to help close the budget gap. Romney’s proposal to slash individual income tax rates across the board by one-fifth, lowering the top tax rate to 28% from 35%, would be blocked by Senate Democrats.
If Obama is reelected: The Bush-era tax cuts for low- and middle-income earners would be extended for at least a year, and taxes on high earners would increase. Obama has vowed to veto legislation that does not include some tax hikes for the wealthy. He has defined “wealthy” as households earning $250,000 a year or more. Republicans in Congress would fight him, perhaps for many months, but ultimately would not want to be held responsible for a universal tax hike. In the end, Congress would approve an increase—as long as the income threshold were raised, probably to $1 million. One strategy Democrats have eyed to get past gridlock is to let all the tax breaks expire at year-end and then propose a bill to reinstate them for the middle class—a measure that Republicans might back.
CAPITAL GAINS AND DIVIDENDS
Long-term capital gains from the sale of securities now are taxed at a maximum rate of 15%, but the tax will rise to a maximum of 20% if Congress does not pass new legislation by year-end. So-called “qualified” dividends currently are taxed at up to 15%. All dividends, including qualified dividends, will be taxed as regular income if the Bush tax cuts are not extended. (Also, a 3.8% Medicare surtax will be added on high earners’ investment income under the Affordable Care Act.)
Under Romney: Although Romney has proposed eliminating taxes on capital gains and dividends for individuals earning less than $100,000 and couples earning less than $200,000, Congress would likely maintain current rates for all income levels.
Under Obama: Obama would like to extend the current tax rates on capital gains and dividends for another year for families earning less than $250,000 but not for high earners. Republicans would compromise with the president but would win a concession to move that threshold higher. Senate Democrats have proposed capping the dividend as well as capital gains tax rates at 20%.
The current tax exemption of $5.12 million on estates and the top rate of 35% on amounts above that level are due to change to a $1 million exemption with a top rate of 55%—meaning higher taxes for some middle-class people and most wealthy people.
Under Romney: He wants to abolish the federal estate tax. Senate Democrats would not accept this, and Romney would settle to keep the $5.12 million exemption and 35% maximum tax rate.
Under Obama: He would push for estate tax rules that yield more revenue than today’s rules but would meet great resistance from Republicans. In the end, Obama, like Romney, would agree to keep the 2012 exemption and tax rates.
THE LOOMING “FISCAL CLIFF”
The failure of the bipartisan congressional “super committee” to forge a deficit-reduction deal earlier this year means that hundreds of billions of dollars in automatic spending cuts on defense and social services programs are scheduled to kick in starting in 2013. The Congressional Budget Office estimates that the economy would shrink by 1.3% in the first half of next year and push the country back into recession.
Under Romney: He would seek to reduce the federal budget by making 5% cuts in domestic programs, including those for health-care research and law enforcement, as well as budget cuts at the Department of Education and the Department of Housing and Urban Development. Democrats in Congress would reluctantly compromise to avoid the automatic cuts so that both parties could take credit for saving the economy. Areas such as defense spending and energy tax breaks would go relatively unscathed.
Under Obama: He also would seek to scale back or delay the automatic spending cuts through compromise and by seeking tax reform, but I would expect any major proposal that includes tax increases to die in the House.
Both campaigns will stress economic growth and more jobs this fall, but the outcome of the presidential election will not make a big difference in whether the economy can continue its recovery.
Under Romney: He would reduce regulations on small businesses in the hopes of stimulating private-sector investment and job creation, steps that often do not require a congressional vote. He also would reduce the top corporate tax rate from the current 35% to 25%.
Under Obama: His efforts to stimulate the economy through a large federal jobs bill would continue to be thwarted by Congress. But he might seek to lower corporate tax rates to 28% and eliminate tax incentives for companies to ship jobs overseas.
WHAT TO DO
Here are the actions you need to consider after the November elections, depending on who wins…
A Romney victory: Focus on stocks of defense contractors, banks and other financial institutions, high-end retailers and domestic energy companies.
An Obama victory: High earners—meaning any households earning $250,000 or more a year—need to create an action plan. Talk to your financial adviser. You might want to take additional taxable income in 2012 if possible…consider selling your winning stocks in order to pay long-term capital gains in 2012 and hold off selling your losers until 2013…and shift fixed-income investments into tax-deferred accounts.
Investors should focus on stocks in areas that Obama will continue to support, including the alternative-energy and health-care industries.
Source: Gregory Valliere, chief political strategist at Potomac Research Group, a nonpartisan research firm based in Washington, DC, that advises institutional investors on how federal policies affect financial markets. Previously, he served as managing director and chief strategist with the Washington Research Group of Charles Schwab & Co. www.PotomacResearch.com