Morningstar Advisor - Fall 2008 - 36

Spotlight Gimme Shelter By Mark W. Tatge Financial advisors and their clients begin planning for the inevitable: new tax headaches. Forget the campaign promises the new president made. Taxes are headed up. Financial planners are bracing for tax changes, given the growing list of big bills that need to be paid: Medicare, the new Medicare prescription drug benefit, Social Security, billions in bridge and road repairs, billions more for mortgage-related financial bailouts, and the growing cost of supporting expensive wars in Iraq and Afghanistan. “Tax increases are going to hit everybody,” says Ryan Huey, director of financial planning at Perryman Financial Advisory in Dallas. “The long-term capital gains rate (now 15%) could very well double.” A plethora of tax targets are being discussed-increasing Social Security wage taxes, raising the tax on qualified dividends, raising marginal tax rates, boosting taxes on corporations, implementing a windfall profits tax on oil companies, and limiting both corporate and individual taxpayers’ deductions. How many of these tax changes will clear Congress remains a matter of speculation. But investors would be wise to assume the worst and to get a head start on their tax planning for 2010 and beyond. Of course, raising revenue is only one side of the equation. Cutting spending is the other. And some economists would prefer Washing- ton exhibit some fiscal restraint before resorting to raising taxes. “U.S. households and the government have been living beyond their means for several years,” says Michele Gambera, chief economist for Ibbotson Associates, a division of Morningstar. “This needs to change.” Gross’ $1 Trillion Fix now is fiscal spending and lots of it. No ordinary Starbucks will do. [Y]ou need to step up for a six-pack of Red Bull.” The U.S. is in for a rough ride if the fiscal Red Bull doesn’t work, Gross says. He draws parallels to the crushing deficits that Japan incurred after the real estate meltdown in the late 1980s. “They experienced a liquidity trap that stifled investment and failed to revive their economy for nearly a decade,” Gross says. “Some fear the same thing here in the U.S.” The United States ran up record deficits during the 1980s only to run a budget surplus in the 1990s. But as with most debts, the problem is paying them back. Promises, Promises Whether the solution is more taxes, less spending, or a combination of both, quick fixes aren’t apparent. The White House Budget Office predicts that President George W. Bush will leave the new president a $482 billion budget deficit in fiscal 2009, a figure that could easily top $500 billion once the full cost of wars in Iraq and Afghanistan is included. Deficits are expected to only deepen as the economy struggles, fueling a debate about whether the United States is digging itself into a big economic hole. Ever the contrarian, PIMCO founder and chief investment officer Bill Gross has been campaigning for an old-fashioned Keynesian economic stimulus. Gross says that the next president needs to prime the economic pump on the order of $500 billion--giving the United States a $1 trillion deficit. “You’ve inherited a mess,” Gross wrote in a July open letter to Barack Obama. “What you need Economists say that digging out from under big deficits could be tougher this time, given structural changes in the global economy, an aging U.S. workforce, and increased demands placed on Medicare and Social Security by 76 million baby boomers beginning retirement. The easiest solution would be for the United States to spend less. But cutting spending doesn’t get candidates elected president, which explains why both candidates promised voters a grab-bag of goodies and tax changes. What they didn’t advertise was how much their plans would cost. The 10-year cost of each 36 Morningstar Advisor Fall 2008

Morningstar Advisor - Fall 2008

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