If you watch network television in any of the swing states, you know that many people are very concerned about who will win the presidential election in November.
But financial advisors across the country are more concerned with the political stalemate that has occurred in the past four years, especially the failure of the budget super committee to come up with a way to cut $1.2 trillion from the budget over 10 years.
Because of that failure, many items, including tax changes that were put in place in the early 2000s, will sunset in 2013 unless the Republicans and Democrats can come up with a workable plan.
“I’m more concerned about the policy that could come from a stalemate than specifically who wins the election,” said Tom McGuigan, a financial advisor with Exencial Wealth Advisors in Old Lyme, Conn.
“Three entities need to provide leadership: the White House, Senate and House of Representatives. We need some leadership somewhere to solve this problem we’ve gotten ourselves into. I think everyone can take a certain amount of responsibility for that.”
Among those items set to expire in January are changes to the estate tax. Back in 2000, individuals were taxed on everything above $1 million. That amount has since risen to $5.2 million. If the estate tax changes are not extended, the threshold goes back to $1 million.
“It’s a heck of a way to run a business because nobody knows how to plan for that,” McGuigan said.
Currently, top wage earners are taxed at 35 percent. If the Bush tax cuts are allowed to expire, that figure rises to 39.6 percent on Jan. 1. “Really, it is effectively 42 percent because they are taking away itemized deductions at that level of income,” McGuigan said. “For people with lower incomes, the 10 percent bracket, which currently exists, will disappear on Jan. 1. Those folks will owe 15 percent of their income. That’s a third of a jump; really significant for folks who don’t make a lot of money. All brackets go up unless there is some sort of agreement.”
T. Doug Dale Jr., a client advisor for Security Ballew Wealth Management in Jackson, Miss., said he believes the U.S. is on the same precipice Europe has found itself on in the past year.
It’s no secret that Congress is waiting and Republicans and Democrats are waiting to see the outcome of the election to do anything with potential tax and spending cuts, he said. “The fiscal cliff, it is being called. It will be interesting to see how it plays out. The assumption is they won’t do nothing. They won’t let the tax cuts expire, which are a meaningful amount that would guarantee a recession,” Dale said.
“The question becomes, would the Republicans cave if Obama stays in office for another four years to allow for tax cuts to be extended [only] for those households making under $250,000 a year, or would they say ‘all or nothing?’”
Dale added that if the Republicans stuck by their “all or nothing” position, President Obama would likely veto the legislation “and we would end up with nothing, which would be a surprise to the markets.”
If candidate Mitt Romney wins the election, Dale said that it was likely the Bush tax cuts would be made permanent but that the government would still have to come up with viable ways to reduce the deficit.
“That needs to happen. You can’t spend $1 trillion more than you are taking in. It will put us on the same path as Japan and ultimately Europe if we’re not careful,” he said.
That includes making cuts to Social Security, which both sides seem loath to do. “They’re not likely to do that until they are forced to,” Dale said. “That’s the problem. When you are forced to do something quickly, like Greece, it causes a greater shock to the economy than if you have time. It is a sad state of affairs when you don’t have leadership.
“Not many leaders in Congress will speak the truth and help Americans know what is at stake,” he added. ”I think they would be surprised. The country could have the political will to accept the required changes.”
Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, said that it doesn’t really matter who takes office at this point when it comes to tax reform.
“The issue surrounding tax reform and the impact on retirement plan incentives remains the same,” he said. “What matters is who is in Congress in terms of details about retirement plan issues. The president is going to see the big picture; the nuts and bolts of the big picture are decided on Capitol Hill.”
One issue ASPPA is keeping an eye on is the definition of who qualifies to be a fiduciary under the Employee Retirement Income Security Act of 1974. “If Romney wins, that regulation will not pass, but if Obama wins, that regulation will march forward and it is very controversial,” Graff said.
He added that he doesn’t think “one party has a monopoly on retirement issues. Traditionally, retirement plan legislation has been done on a bipartisan basis. The increases in the limits and incentives for retirement savings that occurred in 2001 and again in 2006 were both passed with bipartisan votes.”
Graff said that he hopes when tax reform does finally come to the table, legislators leave the retirement tax incentives in place that were made permanent in 2006.
“It would be tragic to reverse what gains the retirement system has gotten. Hold the line and maintain the incentives that are helping people save for retirement,” he said.