Taxes and Campaign 2008

In the last two weeks, there has been significant press on the tax reform proposals of both Presidential candidates. Both platforms include substantial tax reductions. Unsurprisingly, McCain's cuts are likely to disproportionately favor the largest taxpayers, while the benefits of Obama's cuts would primarily effect lower income Americans. An excellent study by the Urban Institute concludes that "[The candidates] specific non-health tax proposals would reduce tax revenues by $3.7 trillion (McCain) and $2.7 trillion (Obama) over the next 10 years, or approximately 10 and 7 percent of the revenues scheduled for collection under current law, respectively." Both candidates advocate continuing the 2001 Bush Tax Cuts to some degree and both are arguing for new reductions in the corporate income tax rates, but there are some significant differences in their approaches and, as with all things, the devil is in the details.

What, on the surface, may seem like very similar proposals would have potentially very different effects on the capital markets and broad implications for our clients. Both plans have components that would dramatically influence tax receipts and the economy in general. In particular Sen. Obama's expressed desire to see both long and short term capital gains taxes increased on most assets is quite concerning, because such an increase is likely to discourage the movement of capital and this hinders the proper functioning of markets.

However, his proposals to see capital gains completely eliminated for "startups" is extremely attractive as historically innovation and jobs have overwhelmingly originated from smaller firms and such an approach would seem to be highly stimulative. What Obama's proposal represents as much as anything is the transformation of the Democratic Party - particularly the increasing dominance of Venture Capitalists and other types of financiers. Such a proposal is likely to be treated with a great deal of skepticism for the fact that the Democratic party has a less-than-stellar historic track record (nationally) of supporting small business and many forces in the party (most notably House Ways and Means Committee Chairman Charlie Rangel [D-NY])have actually argued for the rolling back of standing tax legislation that supports venture capital and private equity. It is reasonable to believe that President Obama may find a great deal of resistance to his proposals from old line Democrats, similar to the experience of Carter and Clinton following their elections as relatively economically conservative democrats.

What is most striking is that neither candidate seems to want to commit to balanced budgets in the coming future. By their own admission, but candidates would substantially worsen the fiscal situation of the federal government (at least in the short term), which many observers (myself included) would argue that this will likely highten a general sense of unease and uncertainty with the influence long-term investment patterns negatively. It's reasonable to expect significant resistance to their agendas from fiscal conservatives on either side of the aisle.

I plan on giving a detailed review of the tax proposals of both candidates in a presentation early next month.