Legislative Update. What s up on Capitol Hill?

Transcription

1 Legislative Update What s up on Capitol Hill? ksponsored by: Mark Phillips, MBA, CFP, AIF (Financial Advisor) MacArthur Blvd., Ste 225 Irvine, CA Ph (949) Fax (949) Mark Phillips (CA Insurance Lic#: 0D07767) is a Securities Registered and Advisory Representative Services offered and Investment through Commonwealth Adviser Financial Representative Network, Member with/and FINRA/SIPC, offers Securities a Registered and Advisory Investment Adviser. Services Wealth through Management Commonwealth Services are Financial offered as Network, an Investment Member FINRA/SIPC, a Registered Investment Adviser. Adviser Representative of Commonwealth Financial Network.

2 Legislative update What s up on Capitol Hill? Presented by Thomas Rowley Director, Retirement Business Strategies Invesco 2

3 Important information The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation. The opinions in this piece are not necessarily those of Invesco. Information in this report does not pertain to any Invesco product and is not a solicitation for any product. The tax information presented is based on current interpretation of federal income tax law. State and local income tax laws may differ from federal income tax law. 3

4 The story of area codes / / / / / / / / 213/ 810/ 567/ / / / / 718/ / / / / 678/ / / / 469/ / / 713/ / / / 239/ /

5 Opposing philosophies and economic theories Community Society Role of Government: to be responsive to social needs Government Keynesian Economics Social Security (Demand) Government Taxing and spending Medicare, should and be used to employer help manage health economy care Employer Stimulate demand: pension plan interest rate reduction government spending Government spending, gives consumers income who then spend more, fueling production. Ownership Society Maximize choice by creating efficient competitors You Hayek individual Economics account (Supply) You Laissez-faire: individually free economy owned health from plan state and intervention health saving account You Promote retirement growth: savings account lowering tax rates reducing regulation Consumers benefit from greater supply of goods and services at lower prices. 5

6 Perfect storm for reform Gathering storm clouds? 78 million baby boomers retiring 1 High US deficit and debt Cost of Social Security/ health care rising 1 Will the Demand for Assets Fall When the Baby Boomers Retire?, Congressional Budget Office, September 2009 Data shown is most recent available. 6

7 Births (000) Perfect storm for reform US Birth Rates ,500 4,000 3,500 3,000 2,500 Silent Generation b ,000 Baby Boom b Generation X b Echo Boom b For illustrative purposes only. Source: US Birth Rate ; Author s overlay of generational descriptions 7

8 Deficits and debt Deficit: Government spending is greater than revenues for the fiscal year. Surplus: Government revenues are greater than spending for the fiscal year. Note: saw a budget surplus, shown as negative numbers on the graph. Sources: Annual US Treasury Report on Spending and Revenue, Budget of the United States of America, Historical Tables, 8

9 Deficits and debt Debt: National debt is a total of all (deficits minus surpluses). Over 224 years, US has borrowed more than it saved. US owes about $15 trillion as of Source: Budget of the United States of America, Historical Tables, 9

10 Cost of Social Security and healthcare US Federal Spending Fiscal Year 2011 ($billions) Interest 6%, $277 Other Mandatory 13%, $465 Discretionary 18%, $646 Social Security 20%, $725 Medicare and Medicaid 23%, $835 Defense Department 19%, $700 Source: Congressional Budget Office Long Term Budget Outlook 10

11 Who owns the debt? Intragovernmental debt includes: Securities held by US government trust funds. The trust funds are for Social Security, Medicare, and other retirement, military, insurance and transportation programs. Publicly owned debt includes securities sold to private individuals and investors, either domestic or foreign. Public owned debt (US) 36.0% Other Countries 15.0% Total Debt $14.3 trillion Social Security Trust Fund 17.0% All Others 15.5% China 8.0% Japan 6.0% UK 2.5% Source: Report on Foreign Holdings of US Long-Term Securities, US Treasury Department, March 31,

12 $ Billions Total lobbying spending (billions of dollars) $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $ Note: Figures on this page are calculations by the Center for Responsive Politics based on data from the Senate Office of Public Records. Data for the most recent year was downloaded on Feb. 6,

13 Politics, television and entertainment 1980 Cable News Network (CNN): First US channel to provide 24-hour all-news coverage Fox News; MSNBC started. Reality TV existed in some form since early years of TV: Portrays an influenced form of reality, using, at times sensationalism, to attract viewers to increase advertising revenue. Growth around with success of TV series. TV news usually not classified as a reality show. Much of reality entertainment-ized: Cooking, real estate, science, finance. 13

14 The US political spectrum Populism Community Society Ownership Society Libertarian Liberal Left Moderate/ Centrist Right Libertarian Conservative Favor government driven political, economic reform and progressive social policy. Favor progressive taxation to fund increased federal services like welfare, social security, Medicare, student loans and consumer protection. Favor limited government involvement in political, economic and social issues. Favor lower taxation allowing social issues being handled on a smaller scale (state, community level, etc.) and less federal intervention. 14

15 ToM Complexity Melting Point (CMP) The critical moment at which mental and emotional strength gives way in response to the inability to control events due to increasing complication. A situation having so many interrelated parts that becomes difficult to solve, analyze or understand. May lead to willful outbursts of annoyance, rage, emotions and/or disruptive behaviors. 15

16 The US political spectrum Populism Community Society Ownership Society Libertarian Liberal Left Moderate/ Centrist Right Libertarian Conservative Favor government driven political, economic reform and progressive social policy. Favor progressive taxation to fund increased federal services like welfare, social security, Medicare, student loans and consumer protection. Favor limited government involvement in political, economic and social issues. Favor lower taxation allowing social issues being handled on a smaller scale (state, community level, etc.) and less federal intervention. 16

17 The US political spectrum Red State Republican Blue State Democrat 17

18 Where are we going? What we know What s on the 2013 agenda Social Security Health care Taxes 18

19 What we know Fiscal Cliff is behind us. Have we solved the issue? Affordable Care Act is law. Taxes take affect 2013, law kicks in Dodd-Frank financial reforms are law. Rules and regulations will be worked out and implemented. Cabinet members are planning to leave. Defense Secretary Leon Panetta Treasury Secretary Tim Geithner Secretary of State Hillary Rodham Clinton 19

20 Fiscal Cliff Overview 2011 Bowles-Simpson Plan: Balance tax increases ($2.6T) and spending cuts ($2.9T). Debt grows slower than economy, so debt shrinks. Much of proposed cuts were caps on future spending needed both: $1.4T in entitlement programs cuts $2.5T in revenue (tax) increases *Note: Second Boehner offer did not specify mandatory/discretionary spending cut split. Source: 20

21 American Taxpayer Relief Act of 2012 Complex compromise passed in the middle of the night to avoid the fiscal cliff. Kicks the can: delays sequester for two months battles coming: Debt ceiling and budget resolution Spending: entitlement program reforms Social Security and Medicare biggest part of deficit. 21

22 Taxes: an overview Federal taxes as revenue: Most federal revenues come from individuals. Personal income taxes is largest portion of total tax revenues, (some of this is small-business income). Social Security and Medicare payroll taxes are the secondlargest source Source: Joint Committee on Taxation, Federal Receipts by Source, 2010, pp 48, 50 22

23 American Taxpayer Relief Act of 2012 New definition of wealthiest Americans Obama campaigned to raise tax rates on incomes above $250,000. Rates rise to 39.6% for income over $400,000 (single), $450,000 (joint). Tax rates stay same on incomes below. Capital gains and qualified dividend income. Maximum tax rate of 20% in the new 39.6% bracket. Retains 15% tax rates for all other taxpayers. 23

24 American Taxpayer Relief Act of 2012 Limits deductions: Phases out certain itemized deductions and exemptions for incomes above $300,000 (joint), $250,000 (single). May increase taxes for those below new 39.6% rate. Estate, gift and generation-skipping transfer tax: Tax exemption is $5 million(indexed). Maximum estate tax rate increased to 40% for deaths after 12/31/12. Unused gift and estate tax exemption can be passed to surviving spouse. Paychecks may shrink: Social Security taxes go up 2%; payroll tax holiday ends. New 0.9% Medicare tax on wages over $250,000 (joint) and $200,000 (single) filers. New 3.8% surtax on net investment income of certain individuals, estates and trusts. 24

25 Tom s top 10 Capitol Hill phrases interpreted 1. Revenue: your tax money 2. Investment: government spending your tax money On projects benefiting political allies 3. Spending: government spending your tax money On projects benefiting political opponents 4. Stimulus: government spending your tax money On projects benefiting both sides 5. Spending Reductions in the Tax Code: tax increases 6. Eliminating loopholes: increasing your taxes 7. Ending tax cuts: raising your taxes 8. Good faith bargaining: negotiating to raise your taxes, while blaming the other side for raising your taxes 9. Wealthiest Americans: you 10. Paying their fair share: you, paying more taxes 25

26 Social Security reform 26

27 Social Security reform Began to use interest earned in 2011 Principal drain begins 2023 Trust fund exhausted by 2036 Community Society Protect existing system and benefits Ownership Society Road Map for America Proposal Oppose individual accounts FICA taxes currently stop at $113,700 (2013) in income Increase FICA taxes up to $250,000 in income Under age 55 allowed to put percent of payroll tax to personal accounts Gradual increase in retirement age Slow benefit growth by recalculation of cost-of-living allowance (COLA) 27

28 Health Care reform 28

29 Social Security versus Medicare Two-earner couple earning $89,000 and retiring in 2011: Social Security: Paid $614,000 in social security taxes, expect to receive $555,000 in benefits Medicare: Paid $114,000 in Medicare taxes, expect to receive $355,000 in benefits Medicare Trust Fund Began to use interest earned in 2008 Principal drain began in 2011 Trust fund exhausted by 2024 Need 21% increase in taxes or 17% reduction in benefits or some combination Source: Urban Institute estimates 29

30 Patient Protection and Affordable Care Act PPACA (aka Obamacare) PPACA covers uninsured, premiums not based on gender; bans pre-existing condition denials and catastrophic caps. PPACA funding starts % on lesser of income above $200,000 (single); $250,000 (joint) or net investment income 0.9% additional Medicare tax Taxes on pharmaceuticals, high-cost diagnostic equipment 10% federal sales tax on indoor tanning services 2014 Insurance Program or penalties begin. States form insurance exchanges to compare and buy policies Individual mandate begins Employer mandate for employers with 50+ employees Insurer tax: based on market share; rate rises

31 Summary Deficit Taxes Social Programs Community Society Baby Boomers Retiring Ownership Society Soemtmies, atlhuogh cnofusnig, yuo can atculaly uesdnatnrd the udnerlynig stroy wtihuot ervertyhnig sepeleld out ecxatly crroect. I ecnuoarge you to saty fcosued on the mseassge: The future is unknown. For illustrative purposes only. 31

32 One last thing: Are things getting better or worse? A brief quiz: Over the last 20 years, what are the trends for the following measures of US society? Teen pregnancy Juvenile crime High school dropouts Drunken driving Traffic deaths Infant mortality Workplace injuries College enrollment Air pollution Life expectancy Charitable giving Voter turnout Divorce Per capita gross domestic product (GDP) Wage equality Answer for all of them is the same: The trend is positive. We hear negative news more than positive. Progress is a complex network of incremental changes. Source: Progressive Review, American Indicators

33 Important information The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation. The opinions in this piece are not necessarily those of Invesco. Information in this report does not pertain to any Invesco product and is not a solicitation for any product. The tax information presented is based on current interpretation of federal income tax law. State and local income tax laws may differ from federal income tax law. All data provided by Invesco unless otherwise noted Invesco Distributors, Inc.

34 Thank you