The Presidential election is only weeks away now, and it's still anyone's guess as to whether George Bush will be reelected on Nov. 2 or a new John Kerry administration will be installed in January. For months now, talking heads on cable news shows, industry analysts, and everybody in between have debated whether a Bush or Kerry Administration would be better for the economy, financial markets, and the country as a whole. While studying the potential effects of a Presidential candidate's platform is standard practice, it isn't really the best way to gauge what will actually occur during a President's time in office. What matters most is how amenable Congress is to passing what's on the President's agenda. Rarely have Democratic Presidents been able to get much done under a Republican Congress, and vice versa.
Jonathan Golub, a VP and U.S. equity strategist at JPMorgan Fleming Asset Management's retail business, remembers how impossible it was for former Democratic President Bill Clinton to get his health care reform package through a Republican Congress. "It never happened," Golub recalls. If Kerry is elected, Golub predicts he'll have a bear of a time getting his proposed tax package through the current Republican-controlled Congress. While taxpayers will likely see higher taxes no matter who's elected–thanks to the huge deficit Bush has racked up–Kerry's more aggressive stance on raising taxes on the wealthy will likely turn out to be "more benign" than he's proposing, Golub says.
Capital Gains, AMT, Dividends
Taxes have been a big campaign topic for both candidates. If elected, Kerry promises to boost the long-term capital gains rate to 20%. That's why planners have been counseling clients with huge capital gains to take them this year so they can take advantage of the current 15% rate, which Bush instituted through JGTRRA and has said he would maintain. But Kerry says he would cut the capital gains rate to zero on startup investments held for more than five years in certain small businesses. In addition, Kerry promises to raise the top rate on dividends to as high as 39.6% for high-income individuals. It's uncertain at what income level that rate would kick in, says Bill DeReuter, government relations assistant director and tax expert with the Financial Planning Association in Washington, but Kerry has proposed raising taxes on those who earn up to $200,000 annually.
Both Kerry and Bush would also extend the Alternative Minimum Tax (AMT) relief for one year. "Bush has asked Treasury to study the AMT and propose a long-term solution," DeReuter says. And "Kerry has indicated he would work with Congress to find a long-term solution." Fixing the AMT will lead to tax reform and revising the tax code, DeReuter says, because an AMT overhaul would require "revisiting the rates." (For a comprehensive look at the AMT, see this month's ).
Bush has said he would make permanent the tax cuts implemented through his two major tax initiatives–the Economic Growth and Tax Relief Reconciliation Act of 2000 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), which became law in 2003. That would keep intact the top income tax rate of 35% and the 33% top rate on dividends. As mentioned, Kerry would raise the top marginal tax rate from 35% to 39.6%, and boost the current 33% dividend tax rate to 36%. In addition, "Kerry has suggested unspecified tax cuts for lower-income households to help pay for college, childcare, and healthcare," DeReuter says. Moreover, "Bush has said he wants to create a bipartisan commission to reform and simplify the tax code," he says, "which has long-term implications for planners."
As for the estate tax, Bush wants to make the repeal of the estate tax permanent. Kerry doesn't. Kerry "would raise the basic exemption to $2 million immediately, and would set a $10 million exemption for small businesses and family farms," DeReuter says. "The exemption on the Kerry side would grow with inflation."
Retirement Planning
Bush failed to mention his retirement proposals–Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), and Employer Retirement Savings Accounts (ERSAs)–during his acceptance speech at the Republican National Convention in New York in August. Some analysts have said the proposals are part of Bush's tax package. Kerry hasn't said a word about the plans, so it's unclear if he would brush them aside if elected.
Several tax provisions expire this year and must be extended–the marriage penalty relief, the one-year AMT relief, the child tax credit, and expansion of the 10% tax bracket. DeReuter says he expects Congress to extend all of the provisions this year. "There doesn't seem to be any disagreement [among members of Congress] that those [provisions] need to be extended," he says. "The debate is really over how long to extend" them.
If Bush gets in for a second term, his proposed private accounts for Social Security may come back into the light. Planners would likely be able to use the accounts as an estate planning tool for their clients. The Bush team has divulged "precious few details" about the accounts, according to DeReuter, but the intent would be to allow taxpayers to "direct a portion of their FICA taxes to a personal account" that would be part of their investment portfolio. Investors would "maintain ownership of the account throughout their lives," and the money could be passed on to their heirs.
