The Candidates and the Markets: How Would Clinton or Trump Govern?

As the personality-fueled presidential campaign rages on, little time has been spent on how a Clinton or Trump presidency might affect the economy and the markets. Yet the candidates’ respective policy objectives are likely to have profound effects on investors. This paper discusses the fiscal policies a Trump or Clinton administration would likely pursue, whether those policies are likely to be implemented, and how those policies could affect businesses, borrowing, taxes, and the markets.

Our Election Predictions A Review

Here are the predictions from our July white paper, Sizing Up the General Election:

  • The Republicans will keep control of the House of Representatives.
  • The party that wins the White House also will control a majority of the Senate.
  • Neither party will hold the 67 Senate seats needed to override a presidential veto or the 60 seats required to break a filibuster and allow legislation to proceed. The metrics underlying the presidential election (evolving demographics and the Democrats’ natural advantage in the Electoral College), combined with the manner in which the candidates have operated their respective campaigns to date, make Clinton the heavy favorite. But it is too early to declare the race over. Trump’s uncanny ability to control and bend the rules of engagement give him a “puncher’s chance” of prevailing. Facing a heavily favored opponent, he still could pull off an unlikely win by landing a rhetorical punch that gets through Clinton’s defenses and severely rattles her. Until we see how — and whether — Clinton handles the Trump onslaught in their debates, it is premature to declare her the clear winner.

A Clinton Presidency

Hillary Clinton’s fiscal and tax policies hue to the Democratic Party line. She believes that capitalism has hard edges, and government programs are needed to help those in lower socioeconomic classes move up to the shrinking middle class. Clinton advocates for new or expanded government education and jobs initiatives and a higher minimum age. She would not reduce entitlements, instead leaving in place (or increasing) current Social Security and Medicare benefits even for young workers.

Clinton would pay for her initiatives with new taxes that would fall almost exclusively on affluent families. Higher income families, she asserts, have done far better financially in the economic recovery than have working Americans, and can afford to help those left behind.

Based on our predictions, Clinton will face a Republican-controlled House. In our view, Clinton’s unpopularity (over 50% of voters view her unfavorably), coupled with extant Republican antagonism, will significantly compromise the honeymoon period that typically follows a presidential inauguration. We look for a contentious relationship between the House and the White House from the beginning.

House Republicans are exceedingly unlikely to agree to Clinton’s call for higher tax rates and higher domestic spending. Thus, we see a Clinton presidency as a continuation of the Washington gridlock of the last six years (since the Republicans assumed control of the House in 2010). Few initiatives will be enacted and sweeping legislation will be scarce to non-existent. Instead, Washington will address fiscal deadlines with eleventh hour short term extensions, kicking the can down an abbreviated road.

Although such gridlock is frustrating to many American voters, it might not be detrimental to the markets. Markets react negatively to uncertainty. When one party controls the White House and Congress, the possibility of sweeping legislation antithetical to businesses remains a possibility. During the first two years of his presidency Obama enjoyed a filibuster-proof Congressional majority. Those years saw the passage of the Affordable Care Act, Dodd-Frank bank reform, and other sweeping legislation viewed by many as harmful to business. Gridlock virtually eliminates the risk of major legislative changes, freeing the markets to focus less on Washington policy and more on economic developments.

A Trump Presidency

Donald Trump is anything but predictable. That attribute alone has the potential to roil the markets. A number of months ago, Donald Trump, drawing on his bankruptcy experience, ruminated that it might make sense for the U.S. to negotiate a “haircut” on its loan repayments, giving Treasury debt holders less than the face amount to which they are entitled. Trump walked back that comment shortly after making it, but a similarly explosive comment from a sitting president likely would cause significant market turmoil.

Consistent with his “America First” policy, Trump wants to impose hefty tariffs (reportedly as high as 40%) on foreign goods entering the United States. Our trading partners presumably would retaliate with their own tariffs on goods from the United States. Most economists believe the resulting drop in U.S. exports could have a devastating effect on domestic businesses.

In contrast to Trump, most of the House Republican leadership supports broad free trade principles, and thus is unlikely to enact Trump’s radical trade policies. But failure to derail those initiatives quickly could precipitate nervousness in the markets.

On the fiscal side, like Clinton (and unlike the other Republican presidential candidates), Trump would not reduce Social Security or Medicare benefits even for young workers. Also like Clinton, Trump would initiate a large scale infrastructure repair program. And he would spend significantly more to shore up the military. But while Clinton calls for increased taxes on the wealthy, Trump would reduce taxes significantly across the board. Trump’s tax plan is in line with that of the House Republicans, and thus would have a good likelihood of passage.

Although markets initially might cheer lower taxes, the negative consequences to the federal deficit of more spending and reduced taxes could cause overleveraging problems down the road. Thus, a Trump presidency could follow the arc of the George W. Bush presidency, with exploding debt leading to an economic (and market) downturn.

The Fiscal Situation and Taxes

Over the past several years, the deficit has declined steadily from its all-time high in 2009. But, according to the nonpartisan Congressional Budget Office, the deficit is now rising again: the 2015 deficit will grow by a third in 2016. Congressional Budget Office, Long Term Budget Outlook (August 2016). Even in the absence of additional spending, this deficit increase will accelerate in coming years as major entitlement expenditures (Social Security and Medicare payments) grow with the aging population.

Neither presidential candidate seeks to reduce the federal deficit. With spending up, entitlement reform off the table, and the deficit growing, we believe the deficit hawks in the House leadership will be forced to undertake a constant search for revenue. Of course, Republicans will not seek to enact broad tax increases – such as higher tax rates or the elimination of popular deductions or exemptions. Instead, the House leadership is likely to look at less controversial tax changes — smaller items that curtail tax treatment that many in Washington believe is inappropriately generous.

Indeed, this process has already begun. The last government funding compromise (in December 2015) sought partially to recoup increased spending by eliminating a popular (and, in the eyes of many politicians, overly generous) Social Security planning strategy called “file and suspend”.

We believe eliminating the “file and suspend loophole” is a harbinger of things to come. Future funding bills could close other perceived loopholes, resulting in a whittling away of techniques investors use to reduce taxes. Examples of other loophole closures that have been under discussion include:

  • Tax the sale of “carried interests” as ordinary income.
  • Curtail “stretching” of inherited IRAs and 401k’s.
  • Apply required minimum distribution rules to Roth accounts beginning at age 70-1/2.
  • Limit Roth IRA conversions to pre-tax dollars.
  • Treat all distributions from S corps and partnerships to owner-employees as subject to employment taxes.
  • Curtail sophisticated wealth transfer techniques.

Most investors note that taxes already are high. In 2013, tax increases to avoid the “fiscal cliff” and to fund the Affordable Care Act caused the top tax rates on investment income to jump by ten percentage points. As a result, the top 10% of tax returns by income now pay 82% of all federal individual income taxes, the highest number ever recorded. Fairness and Tax Policy, Joint Committee on Taxation (February 2015). Tax rates imposed on upper income taxpayers are now the highest they have been in the past 35 years. The Distribution of Household Income and Federal Taxes (CBO November 2014). And the effort to raise revenue through loophole closers could eliminate many current tax reduction techniques, effectively raising taxes further.

High and increasing taxes make effective tax planning for investments paramount. We review a number of tax planning suggestions – and discuss possible loophole closers in more detail — in our white paper, Investing in a Rising Tax Environment 2016, published earlier this year.

After the election and before the new administration takes office, we will prepare a white paper that discusses in more detail the new president’s policies and their likelihood of enactment, including how the policies could affect individual economic sectors.


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2016. Reprinted by permission. All rights reserved.

The opinions expressed in this article are the author’s own and may not reflect the view of M Holding Securities or WealthPoint, LLC.

File #1658-2016

Government funding and tax extenders legislation affects investors

After weeks of negotiations, Congress reached agreement on a bipartisan bill to fund the government through September 2016.  Following are provisions of particular interest to investors.

The legislation makes permanent (including retroactively for 2015) some provisions that previously had expired every few years:

  • IRA / charitable contribution provision for account holders over age 70-1/2
  • Tax credit for research and development expenditures
  • Enhanced write-off of small business capital expenses under section 179

The legislation extends (including retroactively for 2015) other provisions:

  • Extension and phase out of bonus depreciation through 2019

The legislation includes a number of new provisions:

  • Repeals the forty-year-old prohibition on exports of domestically produced crude oil
  • Expands 529 plan qualifying distributions to include student computers and technology

The legislation delays sources of funding and government reimbursements under the Affordable Care Act:

  • “Cadillac tax”(40%)  imposed on high cost employer health plans delayed until 2020; thereafter tax becomes deductible
  • Medical device tax delayed until 2018
  • Annual fee on health insurance provider premiums written (“belly button tax”) delayed until 2018
  • Government reimbursements for insurance company losses limited to amounts collected from profitable insurers (reimbursement fund must be revenue neutral)

Of interest to financial advisors, the legislation:

  • Does not prevent the Department of Labor from finalizing and implementing the proposed IRA account fiduciary rules
  • Does not make significant changes to Dodd-Frank

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

Another government shutdown?

Congress returns from recess next week facing a month-end deadline to fund government operations for the next fiscal year. I’m concerned we could be looking at a reprise of 2013. That year, the federal government shut down on October 1 for sixteen days over a Republican proposal to defund the Affordable Care Act. Now, Republicans are talking about defunding Planned Parenthood, a proposal the President is almost certain to veto. More broadly, there is significant disagreement on funding for social programs generally (the President wants increased funding; the Republicans are calling for social program cuts). If these disagreements cannot be breached, the government faces an October 1 shutdown.

 

The difference this time is when the debt limit must be raised to allow the federal government to borrow additional funds. In 2013, the government ran out of money and had to borrow by mid-October, setting up an incontrovertible deadline that Congress had to address, reopening the government in the process. This year, we’re told that the government will not need to borrow more money before November or even December. So, if the government shuts down, what will force Congress to compromise and reopen it in the near term?

 

Historically, markets often are volatile as fiscal deadlines approach and Congress appears unable to agree on a solution – until it does. Investors might consider taking action to protect against volatility until these deadlines have been addressed. More aggressive investors might view a pullback as a buying opportunity; markets tend to recover nicely after Congress finally agrees to raise the nation’s borrowing limit (as Congress invariably will do here, likely at the last possible moment).

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015. Reprinted by permission. All rights reserved.

Obamacare upheld again: Consequences for Business Owners and Investors

Presidential Seal

 

 

 

 

Last week the Supreme Court ruled that all qualifying Americans are entitled to receive subsidies to purchase health insurance under the Affordable Care Act, regardless of where in the country they live.  The decision leaves the status quo in place but nonetheless raises considerations for investors and business owners:

  • As interpreted by the Administration, the ACA requires small business owners with more than fifty employees to provide health coverage to their employees beginning in 2016.
  • There remains a concern about inadequate ACA enrollment, particularly by middle- and higher-income Americans.  If enrollment continues to lag, it could lead to significant premium increases, as the insurance pool will not have sufficient “good” risks to balance out the less favorable ones.
  • Speaker Boehner’s legal action against President Obama remains outstanding.  Boehner’s suit objects to the Administration’s unilateral decisions to delay the employer mandate and to reimburse insurance carriers for losses incurred from insuring high-risk people.  A Boehner victory (which most legal experts consider a long shot) could end the carrier subsidies, which likely would prompt carriers to increase premiums or cut coverage to recoup the lost revenue.
  • The decision avoids a decline in health care stock values.  Many companies – particularly for-profit hospitals – benefit from the greater insurance coverage provided by the ACA.  However, premium increases discussed above could cause the feared “death spiral”, in which higher premiums leads to fewer healthy enrollees, which leads to higher premiums, etc.  That consequence could hurt health care stock values down the road.
  • The decision eliminates any realistic possibility of repeal of the 3.8% surtax on investment income for higher-income taxpayers.  Revenue from that tax is used to pay for the bulk of the insurance subsidies that the Court upheld.  There is no realistic prospect of a reduction in tax rates in sight.

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

What is the Generation Skipping Transfer Tax?

Recently, M Financial posted a brief blog on the generation skipping transfer tax.  Please copy and paste the link below into your internet browser to read.Transfer Tax

http://mfin.com/m-intelligence-details/Understanding the Generation Skipping Transfer Tax

 

Life Insurance in a Rising Tax Environment

In March, we posted an article about investing in a rising tax environment.  We at WealthPoint thought the article in the link below would be a good follow up to that article.  Please take a moment to read through it.

Rising Tax Environment

Please click the link below.

WP_Marketing Intelligence Report – Life Insurance in a Rising Tax Environment

Wake Me Up When September Ends

Please read this article written by Andrew Friedman of The Washington Update LLC

In my legislative update early this year, I noted that ongoing acrimony between Congressional Republicans and the Obama White House likely precludes agreement on any broad new legislative initiatives this year.  Instead, Congress and the White House are likely to reach agreement only in the face of “forcing events” – deadlines that compel action to ward off a draconian result.

As it turns out, Congress appears to be arranging for all of the major deadlines to occur around a single date – September 30.  This schedule sets up a massive negotiation for September, when Congress returns from summer recess.  Investors should be aware that this negotiation is likely to lead to market volatility and some new tax changes.

I discuss the upcoming imbroglio in more detail below.  But first, two quick announcements:

  • The Affordable Care Act is affecting retiree medical costs in a number of ways, most of them adverse.  A new white paper on the site, Preparing for Rising Medical Costs in Retirement, discusses how retirees and near retirees can develop an estimate of their likely retirement medical costs and a plan to help defray those expenses.  Subscribers can access the paper here.
  • My colleague Jeff Bush recently launched a new way for you to keep with what he and I are reading each day.  You can now follow us on Facebook to see our daily must read articles:  https://lnkd.in/eJAdh88 .  This is our way of keeping you abreast of the latest happenings out of Washington, happenings that can affect your investments and your business.

Now back to the legislative outlook.  By or around September 30, Washington must reach agreement on:

  • Raising the debt ceiling:  Congressional borrowing authority ended on March 15, 2015.  Current estimates suggest the government will run out of money and need to borrow by around early October.  Failure to raise the debt limit by that time would impinge on the government’s ability to pay interest on debt outstanding, leading to default on U.S. debt.
  • Highway funding:  Funding for summer infrastructure work (road and bridge repair) runs out on May 31.  All indications are that Congress will pass a short term “patch”, funding construction through September 30.  After that date, Congress will need to find a permanent source for highway funding.
  • Government funding:  The federal government’s fiscal year ends on September 30.  By that date Congress must appropriate money to run the government next year.  Otherwise the federal government will shut down on October 1.
  • Tax extenders:  Congress wants to extend a popular group of tax provisions that expired at the end of last year.  Paul Ryan, the chairman of the House Ways and Means (tax writing) committee, said he wants to take up the extenders during the funding discussions in September.

Longtime readers will remember that Washington reached a similar September 30 impasse two years ago, causing the government to shut down for sixteen days beginning October 1, 2013.  In that instance, with the debt limit deadline approaching, Congress and the White House agreed on a plan to reopen the government and raise the debt ceiling.  That plan included caps on future spending on defense and domestic programs.

As in 2013, reaching consensus on these knotty budget issues will be challenging.  With U.S. military involvement expanding, both parties agree that next year’s defense budget must be higher than the spending caps set in the wake of the 2013 budget impasse.  The President, though, insists that any increase in defense spending be matched with a corresponding increase in spending on domestic programs.  Republicans not only oppose additional spending on domestic programs, they are looking to further cut those expenditures.

For investors, the September 30 deadline is important for two reasons.  First, as the deadline to raise the debt ceiling gets closer and Congress and the Administration (likely) continue to bicker, the markets often turn volatile.  I have long said that a market decline over concern about Congress’ impending failure to act is a buying opportunity.  Congress will act – likely at the last minute – at which point the market will recover.  It is incumbent on investors and financial advisors to keep these “forcing event” dates in mind as investment opportunities.

Second, meeting these deadlines requires funding for new government initiatives, such as additional defense spending and funding long-term highway construction.  Congress typically does not like to spend money unless it raises taxes (or cuts spending elsewhere) to defray the additional cost.  Congress thus searches for “loophole closers”– provisions in the tax code that arguably provide unduly favorable benefits.  (An example of a loophole closer that keeps arising – but has never been enacted – is to curtail the use of “stretch” IRAs and 401(k)s.)  Thus, as September approaches, investors would be wise to consider how Congress intends to fund additional expenditures.

One way to fund these new initiatives could be corporate tax reform.  As if addressing these deadlines was not enough, Chairman Ryan hopes to have a corporate tax reform plan ready by the end of the summer.  (It appears that reforming individual taxes is now recognized as too difficult politically.)  If Congress and the White House can agree on corporate reform (possible but difficult), then the funds from a deemed (Democrats) or optional (Republicans) one-time repatriation of foreign earnings could be used to fund the permanent highway bill.  Otherwise, Congress will have to find revenue raisers to pay for highway funding and extenders; Ryan says using repatriation funding without tax reform is a no go.

 

Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

Life Insurance Basics

M Financial put together a piece on life insurance basics that we thought our readers would find educational.  Please take a moment to read through it and use it as a reference.

To view the file, select the link below:

WP_Life Insurance Basics

Life Insurance Policy

 

U.S. HOUSE PASSES ESTATE TAX REPEAL DESPITE VETO THREAT

US House of Rep

By Richard Cowan and David Lawder

WASHINGTON (Reuters) – The U.S. House of Representatives on Thursday ignored a White House veto threat and passed legislation to repeal the estate tax that hits inherited assets worth $5.4 million or more.

By a mostly partisan 240-179 vote, the Republican-backed bill will be sent to the Senate, where Democrats are expected to use procedural hurdles to try to block it. Even if it passes the Senate, it would likely fail to achieve a two-thirds majority needed to override a veto.

House passage was timed for the week when most Americans file their tax returns. Conservatives, who refer to the estate tax as the “death tax,” have long railed against it, arguing it hurts the families of small business owners and farmers.

“It’s past time to repeal this unacceptable tax. Every American deserves the ability to pass their life’s savings to their kids,” said Representative Tom Graves, a conservative Republican from Georgia.

Repealing the tax would boost the federal deficit by about $269 billion over 10 years, according to Congress’ Joint Committee on Taxation.

Few Americans pay the 40 percent tax on assets above the $5.4 million exclusion amount. About 5,400 estates, equal to 0.2 percent of taxpayers, will owe such taxes in 2015, according to the JCT.

(Reporting By Richard Cowan and David Lawder; Editing by Dan Grebler)

The Impact of True Collaboration

Recently, Ryan and Tim were asked by STAFDA, a large national trade association we have spoken to, to write an article for their upcoming trade magazine.  This article highlights the impact of collaboration with an entrepreneurial family group and their advisory team.

Please click the link below to view the PDF file.

The Impact of True Collaboration – Ryan Barradas – Tim Young