Brian and I just returned from the Cambridge Investment Research, Inc. National Conference. In four days we met with investment strategists and experts in taxation, income distribution, alternative investments, and technology. We often gain insights that become applicable to your needs.

In addition to the National Conference, in May we attended workshops with economic and investment updates from nationally known strategists, and also a Wealth Management seminar focused on Social Security, Income Distribution, Taxation and other advanced approaches to problem solving.

It is important when we meet with you that we bring accurate and relevant information. The smartest choice is not always the latest, greatest idea. On the other hand, knowing the latest and greatest can come in handy from time to time.

Fiscal Cliff Notes

In Chicago, we were privileged to hear from Greg Valliere, the chief political strategist for the Potomac Group. His talk included a brief summary of what has come to be known as the “Fiscal Cliff”. The Bush Tax Cuts will expire on December 31 after the two year extension in 2010. Political camps are entrenched and it seems that they prefer a showdown to getting down to the business of running the country.  This is a quick summary of the “Fiscal Cliff” and Mr. Valliere’s comments and opinions.

Alternative Minimum Tax: Every year the AMT creeps down to affect more and more taxpayers. As it affects taxpayers they squawk to the politicians and the politicians put in the annual “AMT Fix”.
Mr. Valliere expects this to happen again.

The Medicare Doc Fix: Our congressional representatives have limited how much they will pay for medical services through government programs. When doctors see what they will get, they threaten to not treat these patients. Congress then does the “Doc Fix” and agrees to pay more. Mr. Valliere expects this to happen again.

Payroll Tax Cut and Unemployment Benefits: Since 2011 the payroll tax has been reduced from 6.2% to 4.2%. Congress has kicked the proverbial can down the road by extending these cuts and unemployment benefits. Mr. Valliere expects this will not happen again.

Debt Ceiling: The debt ceiling limits how much the federal government can borrow. The deficit increases the debt. The good news is that receipts are up in 2012 and he thinks the debt ceiling will not be hit until next year.

Sequestration: In the heat of the Debt Ceiling fiasco of 2011 congress agreed to delegate their responsibility to a committee of 12 members, 6 from the House of Representatives and 6 from the Senate divided evenly between political parties. Their task was to find a Trillion Dollars in savings or the budget would be automatically equally from the military and domestic programs. Big surprise, they could not agree. The law says the cuts to be done in January. Mr. Valliere believes that congress is not likely to make the cuts but will make adjustments which will vary based on who is elected.

Expiration of the Bush Tax Cuts: This is game changer of the fiscal cliff and will potentially impact everyone. Every income tax bracket will rise, capital gains will go up, dividends will be taxed as ordinary income and many believe the economy will tip into recession as cash is sucked out of the system. It is estimated that the return to 2001 tax rates will create a negative 3-4% impact on GDP. Mr. Valliere believes tax reform is inevitible, but the details are a jump ball at this time.

The election will shape the policies that are eventually enacted. However, his conclusion is that the uncertainty is a major contributor to the slow economic environment we are seeing. It is like asking teams to play a game without knowing the rules or boundaries. Investors and companies are reluctant to risk capital in this environment. Now more than ever, it is time to pay attention.

By David M. Wheat, CFS, ChFC

View our October 2012 Newsletter in its entirety here.