A hot topic of conversation at the moment is whether or not it will make any difference to either the economy, or to our taxes, if one or the other candidate becomes president.
As to the economy, I think it takes about five years for actions by the president to have a significant effect on the economy. When President Bush spent a trillion dollars on two wars, it wasn’t until after he was out of office that the main effects were felt. So as to the economy in the near term, I don’t think it matters who becomes our next president.
But as to our taxes, that is a difference that will happen quickly. And here is the most likely scenario.
The biggest single element of potential change is whether or not the Bush tax cuts are allowed to expire. If they do expire our income tax rates will go up approximately 5 percent in most brackets, and long-term capital gains and dividends will begin to be taxed at ordinary rates, roughly an additional 5 percent for most people. The biggest change would be on those paying a 15 percent income tax rate. That would go up to 28 percent and hit a lot of the middle class.
A second effect of expired Bush tax cuts would be a return to the $1 million gift tax exclusion and estate tax exclusion, and a number of related taxes that affect only rich people passing money at death.
Whether or not Congress will act soon enough to reverse this automatic end of the tax cuts is the big question.
Assuming Congress does act, it will probably make a big difference as to who is elected president. If President Obama is re-elected and he can get Congress to go along with him, the tax cuts would remain in play for most taxpayers. But the tax cuts would end for single taxpayers with incomes over $200,000, and married couples with incomes over $250,000.
A lot of people think those numbers are too low, and that a couple making $250,000 should not be in the “super-rich” category. I thought that way myself until I spoke with some childhood friends back in my hometown of Freeport, Ill. When I mentioned the $250,000 figure, one said, “Wow, are there people that actually make that much money?” And then I realized that here in Los Angeles we are in a rarefied atmosphere.
President Obama would also try to get the “Buffett Rule” enacted, which would subject taxpayers with over $1 million of income to pay a 30 percent effective tax rate. I don’t think Mr. Romney would like that.
Things are likely to be very different if Mr. Romney is elected, if he has his way. Tax rates on earned income would be reduced 20 percent from what they are today. The estate tax would be eliminated completely, the alternative minimum tax would be eliminated — a further tax reduction for many, and taxes on dividends, interest, and capital gains for taxpayers with adjusted gross incomes under $200,000 would be eliminated.
So here is the bottom line as I see it: It won’t matter who becomes president. If Congress is deadlocked taxes will go up. If Congress is not deadlocked, for most of us taxes will probably go down. In either case the super-rich are going to pay more taxes.
You make the call
Callable yield notes linked to common stock are being touted by a number of issuers. These notes pay high interest rates, typically 8-12 percent for a short time, typically one to three years. If the stock stays at the same price or goes up, you get your money back at the end of the term. If the stock goes down, you get less than all of your money back, sometimes from the stock instead of your cash investment. If the stock goes down far enough you don’t get anything back.
The issuer has the right to give you back your money and stop paying interest at any time. So what it seems is going on is that the issuer buys the stock and takes your money. If the stock goes up the issuer can sell the stock at a profit and give you back your money. If the stock goes down the issuer keeps your money. This seems like a great deal for the issuer.
It seems to me there is one way the buyer might make it a good deal as well, and that would be to combine the purchase with options. There are option strategies available that make money if the stock goes down, and of course lose money if the stock goes up. But these strategies can be adjusted so that the loss on the upside is limited, so that you would only be reducing the yield a bit. If you are considering buying into these callable notes, you might want to discuss this strategy with an investment advisor.
Stocks that could be hot
And finally we get to everyone’s favorite topic — the hot stocks to buy now. To answer that I looked only at really big companies with a price-earnings ratio of less than 18 and projected earnings for next year at 5 percent or more. Here are a few of the results:
Marsh & McLennan
A nice little portfolio of these stocks seems to me to be a good bet for 2013. Good luck.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.