Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  Leaning Left
Posted Under: Government • Monday Morning Outlook • Taxes
President Obama won a second term as president by three percent of the popular vote, while sweeping the battleground states and winning the Electoral College. Meanwhile, Democrats gained two seats in the Senate and the GOP held onto a comfortable majority in the House.

For investors, the personalities and party of the victors do not matter; what matters is the direction of policy. The most important is that federal spending relative to GDP – which peaked at a post-World War II high of 25.2% after the recession and is still an unusually high 22.8% – is not going to fall to 20% or below anytime soon, which was where it was consistently before 2008-09.

With government so big, the economy will not suddenly find a higher gear. The plow horse economy remains our base case forecast. But equities are still undervalued, significantly.

For policy, the election means the president's health reform law will remain in place. High income earners will face a 3.8% tax on interest, dividends, and capital gains, as well as an additional 0.9% Medicare tax on regular income.

In terms of the "fiscal cliff" – we like "taxmageddon" better – let's start with the easy stuff. The president says he does not want military spending cuts to take effect and, given how inclined some in the GOP are to the Pentagon, we think most of those budget cuts will not happen.

On taxes, everyone knows driving off the fiscal cliff would be economic suicide. We think one overlooked possibility, given the complexity of the issues and lack of time, is an agreement to extend everything for one more year. This would give Congress and the president more time to work on something like Simpson-Bowles.

If this does not happen, then we expect compromises on the cliff. For example, rather than having the payroll tax rate rise by two points in 2013, we expect it to be spread over two years.

On the Bush tax rates, we think a compromise could be in the works that keeps the actual tax rates on income from going back up to where they were in 2000 and before. Both the President and Speaker Boehner have left the door open for making changes that do not lift the actual rates.

If the GOP offers to limit itemized deductions on high income earners by enough to raise the same amount of revenue that would be generated by lifting tax rates back to Clinton-era levels, we think a deal could be done. Even the liberal Washington Post looks favorably on the idea and this would be much better for incentives and economic growth.

For capital gains and dividends, we expect the official rates to go from the current 15% to 20%. Adding the extra 3.8% tax from the health care law would put both rates at 23.8%. That's higher than now, obviously, but the gains rate has hovered between 15% and 28% since the early 1980s and this new rate would be near the middle of the range, while the tax rate on dividends was 39.6% as recently as a decade ago.

Last and certainly not least, we expect the estate tax exemption to remain at $5 million and for the top tax rate to stay near the ultimate compromise for the top income tax rate.

In other words, while there is always a chance that America will fall off the fiscal cliff, we expect calmer heads to prevail. In the end, we don't think the plow horse stumbles, but rather, continues to plod along.

Click here for a PDF version
Posted on Monday, November 12, 2012 @ 11:31 AM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
 PREVIOUS POSTS
The Trade Deficit in Goods and Services Came in at $41.5 Billion in September
The ISM Non-Manufacturing Index Declined to 54.2 in October
Election Matters, But Stocks are Cheap
Non-Farm Payrolls Increased 171K in Oct, Revisions to Aug/Sep Bring the Net Gain to 255K
The ISM Manufacturing Index Rose to 51.7 in October from 51.5 in September
Nonfarm Productivity Increased at a 1.9% Annual Rate in the 3rd Quarter
Personal Income Increased 0.4% in September, Personal Consumption Rose 0.8%
Velocity, Uncertainty & the Economy
The first estimate for Q3 real GDP growth is 2.0% at an annual rate
New Orders for Durable Goods Jumped 9.9% in September
Archive
Skip Navigation Links.
Expand 20242024
Expand 20232023
Expand 20222022
Expand 20212021
Expand 20202020
Expand 20192019
Expand 20182018
Expand 20172017
Expand 20162016
Expand 20152015
Expand 20142014
Expand 20132013
Expand 20122012
Expand 20112011
Expand 20102010

Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.