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Capital-Gains Tax and The Election

Fact: Capital Gains lead to retirement and capital-gains taxes threaten your retirement income.

This November as a new president is decided for America, the Dow Jones Industrial Average drops over 500 points in one day (September 15), the S&P 500 is 28% below its high posted 11 months ago signaling that we are in a Bear Market, Lehman Brothers files bankruptcy putting $600 Billion of its assets up for sale, and AIG, Fannie Mae, and Freddie Mac should have gone under if not for bail outs to continue operations from the Federal Reserve and Treasury.  In the amidst all of this unemployment is above average, inflation is high, the dollar is weak, and gas is outrageous.  Terrorist still threaten what America stands for and American Soldiers give their lives to protect America everyday, very far from home.  This is a very brief list of examples of why November matters.

Capital-gains tax was lowered by Bill Clinton to 20% from 28%.  George W. Bush, once in office, lowered this tax rate on long-term capital gains tax to 15% where it currently is now.

  • John McCain has made it clear that if elected he will maintain the 15% tax rate on the ‘unearned income’ called capital gains.
  • Barack Obama has been unclear on a number but has said that “… we can have a capital-gains tax higher than 15%.”  However he has made it clear that he would not extend the highest rate that Clinton had in office of 28%.  Obama says that this decision to raise capital gains tax comes from advice from “people like Warren Buffet” who say that an increase in the range of 20-25% will not change investment decision making

Commentary:

The most common form and most efficient way Americans save for retirement and the needs of their families when they are unable to earn income is through the Capital Markets (stock market and bond market).  As they invest through the years holding assets or debt of public companies, the value of the assets increases by price increases and dividend payouts.  Once in retirement, these assets are sold over time to provide current income from past savings.  Capital-gains is the difference between the selling price and the buying price.  This ‘profit’ is taxable when held outside of a tax-sheltered account, and even some of these tax sheltered accounts force one to move money out at a certain age.

Until recently large companies would pay excess profits to shareholders in the form of dividends and these dividend checks would provide current income in retirement and more savings before retirement.  Today, These large companies are using the profits that they usually would have used for dividends to buy back company stock and retire the shares.  There are three reasons management of a company would do this: 1.  buying back company stock and retiring the shares increases the price and value of the remaining shares on the market, increasing capital gains.  2.  Management of companies are more and more compensated by stock options which increase in value as the stock price of the company increases in value.  3.  the income from dividends has long been taxed at an investors income tax rate which is usually much higher than the capital gains rate.

Stock buy back is an effective way to compensate shareholders but since there has been a shift in how baby boomers will ‘cash out’ there their retirement portfolio to live off of, there is a new focus on the tax rate that they will pay on their savings.

Also, with a stock Market that is so efficient with thousands of professionals following every stock in the US and everything that happens on Wall Street, the individual investor will be very disadvantaged when the stock market enviably has a massive sell off of stocks to capture the current low capital gains rate when a president is elected who will raise capital-gains taxes.

In Closing:  having the right to choose between two very different presidential candidates is an important symbol of the freedoms we have in America.  This log was certainly biased against Senator Obama since he has the least favorable tax policies for professional money managers who deal with clients portfolios, but when evaluating a candidate it is important to think about the situation as ‘do the benefits outweigh the cost.’

Source: Financial Intelliegence Report

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