The Obama Presidency And Future Changes To Your Taxes And Personal Finances

I recently posted about how I thought Barack Obama’s presidency would affect your personal finances, especially regarding taxes. Today I read an article from Schwab’s November Investing Insights regarding Michael Townsend’s thoughts on the Obama presidency. The president and his policies can have a significant effect on your investing. I’ve been gathering as much information on the impending “change” to put myself in the best investing position possible for the next four years. Below are my thoughts on Townsend’s thoughts.

Obama’s Priorities and Another Economic Stimulus Package

Obama was elected on a campaign that promised “change”. His campaign called for many changes regarding the financial world including:

raising taxes on wealthier Americans, encouraging retirement savings, reshaping the financial regulatory system, supporting alternative energy sources and expanding health care.

Townsend correctly states that he must focus his attention on the economic crisis and stabilizing the financial sector. If Obama does not fix the economy, he will be a one-term president and will not have a chance to implement any of his other plans. This most likely means another economic stimulus, which might consist of the following:

increased unemployment benefits and food stamps, probably combined with a major infrastructure-spending program. … a moratorium on foreclosures and perhaps additional help for struggling homeowners, a temporary elimination of the penalties on individuals who take early withdrawals from their retirement savings plans due to financial hardship, an increase in the deduction for capital losses, aid for the automotive industry and states that have serious budget problems, and possibly rebate checks or a payroll-tax “holiday” for some Americans.

I don’t know how I feel about another economic stimulus package, but Obama will look to quickly make his mark on the economic crisis. A second stimulus package is a foregone conclusion.

Tax Increases

Obama campaigned on a policy of increasing taxes for the wealthy. As soon as Obama has made his mark on the economic crisis you should look for him to start increasing taxes. He will increase taxes on the wealthy first by increasing the top tier or two of the marginal tax rate, as well as, increasing the dividends and capital gains tax rates. If the economy recovers while he’s still in office, I look for him to increase taxes across the board to pay for some of his other changes.

The estate tax is scheduled to be eliminated in 2010 along with Bush’s tax cuts. The estate tax refers to the tax imposed on the transfer of the taxable estate of deceased family members. Obama campaigned on a 45% estate tax rate. Townsend believes the following will occur:

Lawmakers will likely forge a compromise solution before the end of 2009 that sets the estate tax rate at 25% to 35%, perhaps as high as 40%, with an exemption amount of $3 million to $5 million.

Retirement Savings

I may not agree with all of Obama’s changes, however, promoting retirement saving is a great idea. Townsend believes Congress will focus on the areas of coverage, fees and advice. He believes Congress will try to increase retirement savings by setting up “automatic IRAs” for small businesses to allow for payroll deductions straight into an IRA. The point is to provide retirement options for employees of small businesses, without increasing the burden on the employers. This is a great idea. Although it should probably be coupled with an opt-out clause where the employee will be automatically enrolled, and would have to opt out of making contributions to a retirement account.

Fees and advice kind of go hand in hand. Townsend states that Congress has been working on making retirement fees more transparent to the employee, while possibly requiring a low-cost index fund in all retirement plans. Similarly, Congress might try to push through reform regarding the advice available to employees. Congress believes the advisers giving advice to employees might have a conflict of interest. Reform might be initiated to protect the employees from these conflicts of interest. As far as I’m concerned, requiring a low-cost index fund option in retirement plans, in addition to advisers that have the same interests as the advisers will only lead to individuals who are better positioned to take care of themselves in retirement.

Financial Regulation Reform

Since the collapse of the financial sector is at the heart of the economic crisis, reform of the financial sector regulatory system is inevitable. Townsend provides a few options:

One possibility is the creation of a “select committee” in the House, bringing together senior lawmakers from several committees that have jurisdiction. Such a panel would most likely try to create a reform package that could cover a wide swath of issues.

An alternative is to simply let the current committee structure consider a series of reform proposals and perhaps approve them in pieces, rather than in a comprehensive package.

Personally, I don’t like regulation in any form, although fear has definitely gripped the stock market and regulation might be the only way to release it’s stranglehold. I just hope the regulation is not permanent.

Conclusion

Townsend wrote a great article and I recommend everybody read it. The president has a huge effect on taxes and any type of reform. I recommend staying as well informed as possible and this article was a great start.

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