Beyond the rhetoric and media circus, there are some very real differences between the candidates in terms of policy that could have an impact on your financial well-being.
In one of the strangest U.S. presidential elections in history, we have the choice between two of the most polarizing candidates we’ve seen in our lifetime. Since this election cycle has been particularly bereft of policy discussions, I will discuss the basic differences between the two candidates in the areas that I believe may impact you most from a financial standpoint.
Individual Income and Estate Taxes:
Our clients tend to utilize government services less than the average voter; however, they also tend to pay much more in income and estate taxes. There is a large difference between what the two candidates have proposed. Here is a summary of the major differences:
Personal Income Taxes
Clinton: Focused tax increases on the highest income taxpayers
- More complication, but the bottom 95% of taxpayers will be unaffected
- 4% surtax on incomes over $5 million
- If your Adjusted Gross Income >$1 million, minimum 30% tax
- Caps on itemized deductions for high-income taxpayers
- Limits on contributions to retirement plans at certain income levels
- Sliding scale of capital gain tax rates for high-income taxpayers depending on how long an investment is held. Starts at 43.4% and decreases to 23.8% for a 6 year holding period
- Estates greater than $3.5 million for individual filings ($7 million for married couples) would be taxed at 45% vs. the current levels of $5.54 million (individual) and $11.08 million (joint) taxed at 40%
Trump: Short on details, but a slight simplification and a big change for business owners.
- 3 tax brackets instead of the current 7 ranging from 12-33% vs. the current 10-39.6%
- Business owners would pay a flat rate of 15% vs. up to 39.6% currently
- Deduction of child care expenses
- Full repeal of the estate tax
Corporate Income Taxes
The U.S. has among the highest corporate taxes in the world and this has spawned a cottage industry of tax avoidance among U.S.-based corporations.
Clinton: Slight focus on worker re-training
- Corporate tax rates would remain the same at 35%
- $1,500 worker/apprenticeship tax credit for businesses to hire and train employees
- 15% tax credit for companies that share profits with employees
- Regulations to stop U.S. companies from shifting profits overseas to avoid U.S. taxes
Trump: Large reduction in corporate income taxes
- Corporate tax rate of 15% vs. 35% currently
- End tax deferral of overseas profit
- Cap interest expense deductions to discourage excessive borrowing
- 10% repatriation tax for overseas earnings
Health Care
Clinton: Expand the Affordable Care Act (Obamacare)
- Public health insurance created by the Federal Government
- Loosen restrictions on importation of prescription drugs from abroad
- Increase funding for the FDA to speed generic drugs to market
- Cap out of pocket costs for prescription drugs to $250/month
Trump: Repeal the Affordable Care Act (Obamacare)
- Eliminate the mandate that everyone has health insurance
- Shift the responsibility to the states to develop their own health care plans
- Loosen restrictions on importation of prescription drugs from abroad
- Allow insurance companies to sell health insurance across state lines
Summary
During an election, it is easy for the candidates to put forth their ideas that appeal to potential voters. In the end, many of the grand ideas fail to be put into action because of nagging issues like “who is going to pay for this?”
Financial Market Reaction
If Hillary Clinton wins the election, I think the market reaction will be benign since she is a known quantity and at the time of this writing is the heavy favorite to win. If Donald Trump is elected, I would expect the stock market to decline 5-10%. Even though Trump appears to be a more business-friendly candidate, financial markets are allergic to uncertainty and Trump is a wild card on a number of levels.
We Will Continue to Focus on The Things Under Our Control
2016 has turned out to be a pretty good year for investment performance and while we have a number of concerns, our view has been that as long as interest rates remain very low, we should avoid a large correction in most asset classes. Last year, we recommended overweighting non-U.S. Stocks and we have experienced particularly strong performance in this category in 2016. We are now over seven years into the stock market recovery and valuations of U.S. stocks (represented by the S&P 500) are the second highest in history, so we would not be surprised to have a correction in the next six months. We do not think, however, that a correction is likely to end up as another financial crisis. Corrections of 10-15% are a normal part of investing and attempting to predict with accuracy when they are going to occur in advance is something we gave up on a long time ago.
We encourage you to contact a Client Advisor with any questions.
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