Financial Planning – Advisors Blast Obama's Tax Proposals

January 2015

President Obama’s State of the Union tax proposals may be more rhetoric than reality — but financial advisors still didn’t like them.
Obama asked Congress to fund his proposals to expand economic opportunities for the middle class with tax increases for higher-income taxpayers and a fee on large financial institutions.
Specifically, the president’s proposals include raising the top capital gains tax rate to 28% from 23.8% and changing the favored tax treatment of inherited taxes, eliminating the “stepped-up basis” provision.
Even though the proposals have virtually no chance of passage by a Republican-controlled Congress, advisors were wary.
Former NAPFA chair Tom Orecchio, principal at Modera Wealth Management in Westwood, N.J., pointed out that any tax increase could affect clients relying on savings for retirement.
“We have clients who are teachers with portfolios worth over $1 million, which is what they will need for retirement,” Orecchio says. “If they make trades throughout the year that add up to $250,000, they would be affected — even if the president’s increases were lessened by a political compromise.”
Orecchio does note that Obama’s opening proposal would probably have minimal impact on most of his clients.
“Not that many clients have gains of over $250,000 [when the higher rates would kick in] — and even if they do, if the 3.8% surcharge is not added on, it’s only a 4.2% increase,” he points out.
New Haven, Conn., advisor Kevin Guth, meanwhile, faulted the proposals for their impact on retirement cash flow, as advisors have increasingly turned to equities growth as a source of income.
“The important thing to realize is that with interest rates where they are, advisors have had to be creative to get yield for anybody,” says Guth, a partner and managing director at Snowden Lane
Partners. “To use equities for income and growth appreciation is wise, so it would affect advisors in a big way.”
“The markets have done well and we’ve had to use equities to support a client’s cash flow, so it’s a big deal,” he adds. “It would make us rethink our strategies. And it’s not just the wealthy clients who are using these strategies. It would not affect just the millionaires, it would affect all households.”
Another advisor expressed skepticism about the Obama plan’s impact on the economy.
The Democrat proposal is “not a good capital investment policy in my view, and I think many clients would agree,” says Jeanie Wyatt, CEO and CIO of South Texas Money Management in Houston. “The tax proposal would lower the returns and the incentive for capital investment, quite frankly, and is a negative for capital formation.”
President Obama’s proposal “puts the burden on investors and that’s never a good thing,” Wyatt continues. “If you are trying to get people to save money and build infrastructure and get people more secure in their retirement, a capital gains tax [increase] is a bad idea in my opinion.”
Some financial services executives split the difference. Bill Johnstone, executive chairman of D.A. Davidson and the new chair of SIFMA’s board of directors, said in an email that he was skeptical of changes of select provisions of the tax code that encourage investing and saving, but supportive of broader tax reforms.
“We support broad tax reform, both corporate and individual, that simplifies the code and promotes more equitable treatment of taxpayers and encourages savings and investment,” Johnstone says.
The proposed changes would not likely impact the majority of his firm’s clients directly, he said, but would still affect investor behavior as well as client-advisor conversations. “One of the biggest issues that any type of tax reform proposal creates is uncertainty, because there is always a concern about the trend that it signifies,” Johnstone says. “We typically favor a trend and tax structure that encourages, rather than discourages, capital investment.”
Ultimately, however, the proposals may remain just that, several advisors pointed out.
“I don’t believe much will get done between now and the end of 2016,” says John Wolff, chief executive and managing director of Leesburg, Va.-based Capital Fiduciary Advisors. “From a planning perspective, my reaction is stick with the fundamentals — investment diversification, tax loss harvesting and rebalancing, and a focus on long-term goals and objectives.”

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