President Obama's proposed budget for the 2010 fiscal year and projections for the next 10 years provide a clear road map for financial planners and investment advisers. The president made it quite evident in his budget speech that he plans a dramatic change in direction for the economy, with a far bigger role for the federal government.
Unfortunately, that map is marked with lots of difficulties for advisers and their clients.
Despite the best efforts of planners and advisers, most taxpayers who employ them will likely be paying far higher taxes over the next several years.
MINIMIZE IMPACT
The task before those in the financial advice industry will be to minimize the impact of those tax increases on their clients — to the greatest extent possible.
The budget made it clear that Bush-era tax cuts are going away, and top income tax rates will rise to at least the levels seen in the Clinton administration.
If Mr. Obama gets his way, the actual tax increases on high-earners (those couples with annual income above $250,000 and individuals who earn more than $200,000) will actually be even greater because their allowable tax deductions will also be cut.
This proposal alone is expected to raise $318 billion over 10 years.
In addition, capital gains taxes will be increased to at least 20%, from 15%. This should cause some wealthy investors to reallocate assets from common stocks to bonds, especially tax-exempt municipals.
FEDERAL ESTATE TAX
It also is clear that the federal estate tax will revert to near-pre-Bush levels.
But given some dubious assumptions in the budget — for example, the assumption that the economy will begin to grow strongly by 2010 or that the war in Afghanistan won't absorb the money being saved by the withdrawal of troops in Iraq — the tax increases could well be far greater in years to come if Mr. Obama truly wants to cut the enormous federal deficit in half by the end of his first term.
In fact, it is highly likely that the tax increases will reach much further down into the middle class by the end of his first term, as both revenue and the various savings outlined in the budget are likely to fall far short of projections.
Other aspects of Mr. Obama's program will also complicate the lives of planners and their clients by causing reviews of investment programs.
Clearly, some industries will be losers as a result of his proposals.
Oil companies, for example, will lose some $2 trillion of their tax deductions and preferences in 2011 alone.
They will also face increased costs as a result of the president's proposed cap-and-trade system for carbon emissions.
Utilities, long a haven for
dividend-seeking investors such as retirees, will also be hard-hit by any cap-and-trade legislation.
In fact, cap and trade will ripple through the economy, hitting trucking companies, airlines, manufacturing, etc.
Drug companies will be hurt by various proposals, including one that would authorize Medicare to use its size and political clout to negotiate drug prices with manufacturers.
These are just the obvious effects of the budget proposals.
No doubt, market analysts will be scouring the budget proposals, and in particular the budget Congress actually passes during the year, for insights into which industries will be hardest-hit.
Planners, advisers and their clients will have to pay close attention in the coming months so they can rearrange their affairs to minimize the impact of the national change in direction.
