taxes and politicsdocuments.sifma.org/uploadedfiles/education/securities...•mortgage interest...
TRANSCRIPT
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The views and opinions expressed in this presentation are those of the author and
presenter and do not necessarily reflect the views and opinions of the sponsoring
companies or their affiliates.
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Disclosure
Neither Andrew Friedman, nor any law firm with which he 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 and may not be
regarded as legal or tax advice, and financial advisors and other recipients of this
information may not rely upon it (including for purposes of avoiding tax penalties
imposed by the IRS or state and local tax authorities). Advisors should consult with
their firm’s legal and tax counsel as to matters discussed herein. Clients should
consult their own legal and tax counsel before entering into any investment, annuity,
estate planning, or trust arrangement, and financial advisors should advise their
clients to do so.
Copyright Andrew H. Friedman 2015. Printed by permission. All rights reserved.
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New Yorker (November 2014)
2014 Election
Results
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• Unlike in 2012 (when Republicans lost Senate seats),
in 2014 the Republican Senate candidates typically
were from the moderate wing of the party, permitting
them to attract Independent votes.
• As moderates, most Senate Republicans are likely to
seek incremental progress through limited bipartisan
legislative efforts.
2014 Elections - Senate
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2014 Elections – House Redistricting
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• Most House incumbents worry about winning the
primary more than the general election. As such, they
tend to be more from the conservative wing of the
party.
• Conservatives often have preferred to fight rather
than compromise on core beliefs, even if that means
passing only bills that will not become law. They may
be more willing than Senate moderates to stake out
positions for 2016 by sending Obama legislation he is
likely to veto.
2014 Elections - House
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2014 Elections
“[Republicans] have to govern responsibly. We have to
show that we can be a productive party. That will have a
direct effect on whether we’re able to elect a Republican as
president in 2016.”
Senator John McCain (R.-Ariz.)
January 2015
“Conservatives ought not to delude themselves that [a]
Republican Senate majority will somehow be a conservative
majority. We should have no expectation whatsoever that
they will listen. That’s why we’re fighting.”
L. Brent Bozell III, President, Media Research Center.
May 2014
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• Treat Republican victory as a repudiation of his policies
(seek compromise with Republican Congress), or
• Treat Republican victory as just another impediment to
the implementation of his legacy (seek to bypass
Congress and act by executive order).
Split government continues.
2014 Elections –
Split Government (Obama)
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• Eliminate stepped-up basis at death (“trust fund loophole”).
• Increase top capital gains and dividend tax rate to 28%.
• Impose 7 bps fee on the liabilities of U.S. financial firms with
assets over $50 billion.
• Prohibit contributions to qualified retirement plans if total
balances exceed $3.4 million.
Raises $320B to “pay for additional reforms that will help the
paychecks of middle-class and working families go further to
cover the cost of child care, college, and a secure retirement.”
Obama Tax Proposal (2015)
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• Homeland Security funding (February 27)
• Debt ceiling (March 15)
• Medicare “doc fix” (March 28)
• Highway funding (May 31)
• Export-Import Bank (June 30)
• Government funding (September 30)
• Tax extenders (December 31)
Beware tax revenue raisers
2015 “Must Do” Legislation
(Forcing Events)
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• Tax offshore earnings of U.S. multinationals
• Tax sale of “carried interest” as ordinary income
• Eliminate pass-through treatment for oil and gas MLPs
• Curtail “stretch” IRAs and 401k’s
• Limit Roth conversions to pre-tax dollars
• Apply RMD rules to Roth accounts beginning age 70-1/2
• Treat all distributions from S corps and partnerships to
owner-employees as subject to employment taxes.
• Curtail sophisticated wealth transfer techniques
Obama Budget Plan – “Loophole” Closers
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“Forcing” Events
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• Government appropriations (budget)
• Foreign trade
• Obamacare
• Energy
• Tax reform
2015 Possible Legislation
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Mandatory Programs
(Entitlements)
$2,096 (60%)
Interest
$229 (6%)
Defense
$583 (17%)
Domestic
$583 (17%)
Source: The Budget and Economic Outlook: Fiscal Years 2015 to 2025, Congressional Budget Office (Jan 2015)
2014 Federal Spending ($3.5T) (in billions of dollars)
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• Deficits will begin to rise in 2018.
• Interest payments will double by 2019.
• Spending will grow faster than the economy for Social
Security; the major health care programs, including
Medicare, Medicaid, and subsidies offered through
insurance exchanges; and net interest costs.
• Outstanding federal debt will exceed 100% of GDP 25
years from now and will continue on an upward
trajectory thereafter, “a trend that could not be
sustained.”
Source: The Budget and Economic Outlook: Fiscal Years 2015 to 2025, Congressional Budget Office (Jan 2015)
Fiscal Outlook (CBO Report)
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“Such large and growing federal debt would have
serious negative consequences, including
increasing federal spending for interest
payments; restraining economic growth in the
long term; giving policymakers less flexibility to
respond to unexpected challenges; and
eventually heightening the risk of a fiscal crisis.”
Congressional Budget Office
January 2015
Fiscal Outlook (CBO Report)
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• 50% of the sequestration cuts are cuts to defense. Those
cuts continue for many more years and are incompatible
with the need to fund significant military operations abroad.
• Absent a change in circumstances, Obama is likely to
continue a middle path, offering air support but short of full
scale military involvement.
• Events that compel a stronger response: terrorist attack on
U.S. soil or an invasion of Israel or a NATO country.
Geopolitical Issues – U.S. Involvement
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• Obama is seeking Congress’ approval for the Trans
Pacific Partnership, a 12 nation free-trade pact in the
Asia-Pacific region. The free trade zone established
would be the world’s largest.
- TPP would lower tariffs, establish guidelines on patents
and copyrights, and level the competition for international
companies that compete with government-backed
businesses.
- Goal is to boost U.S. exports to Asia at a time when the
United States faces increasing competition from China.
Foreign Trade
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• Most Congressional Republicans support the TPP as
fostering global commerce and enhancing U.S.
company exports.
• Most Congressional Democrats oppose the agreement
as detrimental to U.S. labor by opening up labor
competition overseas. Last term, Senate Democratic
leadership refused even to allow a vote on the TPP.
Foreign Trade
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Health Care Reform
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Health Care Reform
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Health Care Reform
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Health Care Reform
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Health Care Reform
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• 2015: Supreme Court decision on premium subsidies in
federal exchange states
• 2016: Employers with 50-100 employees must begin to
provide health insurance coverage to employees.
• 2017: No more insurance company subsidies
• 2018: Cadillac tax takes effect
Affordable Care Act
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• Keystone pipeline
• Drilling on federal land
• Offshore drilling
• Oil and liquid natural gas exports
• Alternative energy
• Proposed EPA regulations curtailing greenhouse gas
National Energy Policy
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• Reduce tax rates
• Eliminate “loopholes”
• Simplify the tax code
• Eliminate the alternative minimum tax
Tax Reform
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• Revenue neutral or generate new revenue
• Cannot favor the wealthy, who benefit from reduction in tax
rates
• Must eliminate or cap some “sacred” deductions and
exemptions to recoup revenue
Tax Reform – Stumbling Blocks
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• 25% tax rate, plus 10% surtax on income > $450K
- Tax-exempt bond interest and employer-provided health
insurance premiums included in surtax. No deductions (other
than charitable contributions) allowed in computing surtax.
• Mortgage interest deduction limited to $500K of debt
• No deduction for state and local taxes
• Charitable contributions deductible only to extent greater
than 2% of AGI
• Half of 401k contributions treated as Roth (non-deductible)
• AMT repealed
Camp Tax Reform Proposal (Individual)
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• Bipartisan desire to lower the corporate tax rate to
keep companies from moving operations offshore.
• Need to recoup revenue lost by lower tax rate will
produce winners and losers:
- Possible winners: service industries, retailers
- Possible losers: technology, oil, manufacturing,
financial services
Corporate Tax Reform
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35%
15%
44.6%
25%
Maximum Tax Rate – Investment Income
2012 2012 Today Today
Ordinary Investment Income Capital Gains
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Tax Rates
“[Current tax] rates are well above the average
rates [during the past 35 years] for households in
the top of the income distribution.”
Congressional Budget Office Report
November 2014
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Investment Planning
• Give increased attention to “tax drag” on investments.
- Harvesting losses
- Buy-and-hold strategies
- Municipal bonds, master limited partnerships, REITs
- Tax-efficient mutual funds
- Other professionally managed tax-advantaged strategies
- Hold tax-inefficient investments inside tax deferral vehicles
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Takeaways
• Potential market declines on “forcing events” may provide
buying opportunities
• Trans Pacific Partnership may benefit companies with
Asian sales or operations
• Adverse Supreme Court decision may hurt companies
dependent on ACA
• Corporate tax reform may produce winners and losers
• Consider tax drag on investment income
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-- from Andy Friedman
@TheWashUpdate
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The views and opinions expressed in this presentation are those of the author and
presenter and do not necessarily reflect the views and opinions of the sponsoring
companies or their affiliates.