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Taxes, Investors and the Presidential Election March 3, 2008 By Scott Whittemore For an investor in a taxable account, the number one cost they must bear is taxes. The tax policy of the new President will have tremendous impact on future returns for investors. There are substantial differences between each candidate's tax policy. The purpose of this article is to look at those tax policies and how they may affect you in the long term. Before we look at each candidate's plan, we need to understand what the current law is. Even if no new laws are passed by Congress or are signed into law by a new President, tax rates are going to go up for investors. Here is how the future tax rates are scheduled to change starting in 2009: Maximum Rate Current Law Ordinary Income Qualified Dividends Capital Gains 2008 35% 15% 15% 2009 & 2010 35% 35% 20% 2011 39.6% 39.6% 20% Ordinary income would not change as significantly as the other income categories. Qualified dividends and capital gains rates are the rates of most concern to investors. For this year dividends and capital gains have substantially lower rates than ordinary income. The 2008 rates are at the lowest levels since before World War II. In 2009, top rates on qualified dividends will more than double. Capital gains will go up 33% (15% to 20%). Under current law, Congress can "repeal" the Bush tax cuts by simply doing nothing. Our future taxes are now in the hands of Congress no matter who takes the presidency. Current Candidates' Positions John McCain wants to retain the lower tax rates in the current law. Currently Hillary Clinton has recommended that the top capital gains tax return to the 20% level it was before the 2001 Bush tax cut. She also recommended that the reduction in the tax rate on dividend income be entirely eliminated. Barack Obama, on the other hand, wants the maximum tax rate on dividends and capital gains to rise to 24%. Both Clinton and Obama have strongly supported a return to the 39.6% tax rate on top income brackets that prevailed before the Bush tax cuts. Here is what rates would look like under each plan: Maximum Rate Plan Ordinary Income Qualified Dividends Capital Gains Clinton 39.6% 39.6% 20% McCain 35% 15% 15% Obama 39.6% 24% 24% Clinton's plan has the highest rates for investors, Obama is in-between and McCain has the lowest. From a point of view of what is possible politically, with it almost certain that the next Congress will be Democratic, so that even if McCain is elected, it is very unlikely that he will be able to get his plan of retaining current 2008 rates to prevail. Both Clinton and Obama, if they are elected, have a much better chance that their plan will shape the new tax law. The bottom line is that it is very likely that tax rates on capital gains are going up to 20% or 24% and dividend rates are going up from 15% to as high as 39.5%. This year will probably be the last year that capital gains and dividends are taxed at 15%. Quantum will be managing clients' taxable accounts with this probable outcome in mind.

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