Valliere: Taxes Will Rise, Whoever Wins in Fall

Greg Valliere, chief political strategist with Stanford Financial Group, has built his reputation on reporting what Washington politicians will likely do that will impact the value of investors’ portfolios.

Now, with the presidential election seven months away, Valliere says investors should get ready for higher taxes and greater oversight of financial services — regardless of whether a Republican or Democrat wins in the general election in November.

"No matter who sits in the Oval Office next January, the reality of a Democratic-controlled Congress means that taxes on capital gains and dividends are sure to go up and could be enacted as early as January 2009,” Valliere told Barron’s.

"Even if McCain wins, there is a high likelihood of taxes going up, and obviously if it’s Obama, it is certain that they are going up,” Valliere said.

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However, he says, "A sweeping universal healthcare plan is unlikely to be enacted, even under a Democratic president, because congressional Republicans would have enough votes to block such a measure.”

As for the hotly contested Democratic nomination, Valliere says "it’s now just too close to call” on whether Obama or Hillary will win. But he is sure that the Democrats will increase their control of both the Senate and House of Representatives.

That will give House Ways and Means Committee Chairman Charlie Rangel and Senate Finance Committee Chairman Max Baucus, both Democrats, a huge bargaining chip when it comes to raising taxes, if McCain is elected president.

"They would go to (McCain) and say, "Look, if you don’t agree to some tax hikes in ’09, we are just going to let all of the tax cuts expire in December 2010.”

Of the four categories of taxes that could rise, Valliere said the big one is the top margin rate on personal income, currently at 35 percent. It’s scheduled to revert back to 39.6 percent at the end of 2010.

"If it’s Hillary or Obama in the White House, it will go back to 39.6 percent next year. If it’s McCain, maybe he drags his feet and it only goes for 37 percent.”

On capital gains and dividends, both currently sit at 15 percent, but they’re scheduled to revert back at the end of 2010 to 20 percent on capital gains and the ordinary income tax rate on dividends.

Valliere said those could go as high as 39.6 percent.

"I think Hillary and Obama would push for something in the mid-20s for both cap gains and dividends,” says Valliere. If McCain is elected, though, "maybe he holds the line.”

What’s key when discussing any possible tax change is the effective date, says Valliere.

"I don’t think that investors can be sure of a 15 percent capital gains rate for 2009, and I think therefore it is going to have a significant impact on investors’ decisions this year,” he says.

As for estate tax, it gets abolished completely in 2010, but then it will be reimposed in 2011 at a much lower exemption amount, going from $3.5 million to $1 million.

"Everybody knows there will be a deal next year to prevent the estate tax from disappearing in 2010. Congress and the president will be setting top rate of between 35 percent and 40 percent with an exemption of $3 million and $4 million.

"That’s one of the reasons why there has to be a big tax bill next year, because no one is going to allow the abolition of the estate tax in 2010.”

When it comes to corporate taxes, Valliere says everyone agrees they’re too high.

"Even Charlie Rangel believes that at 35 percent, our corporate tax is high compared to other nations in the world.”

Valliere sees corporate taxes coming down to 32 percent regardless if McCain or one of the two Democratic contenders is elected.

So will it make any difference if a Republican or Democrat occupies the White House in 2009?

According to Valliere, "The seminal difference is the role of government in terms of bailouts, moral hazard, things like that…There could be far more aggressive regulation of derivatives and investment banks right across the board.”

He added, "That’s the No. 1 theme I think of this election for investors: How much should the government do to save us from ourselves.”

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