Ace

Seems the whole world waited to see what Ms. Yellen would share on Friday morning, when she addressed the august group gathered at Jackson Hole.  As usual for those who serve as Fed chair, her comments were rather muted and opaque.  Markets reacted in kind, doing little.

Those who opine on such matters suggest one or two interest rate increases will show up before year-end.  I’d be surprised though, if any rate increases show up before the general election.

Looking at economic reports, we see that the official CPI was unchanged in July, with energy prices down, and food prices flat.  Excluding food and energy (which make up a significant minority of most household budgets), prices were up 0.9% in July, and up 2.2% over the last twelve months.  The Fed’s target inflation rate is supposedly 2%, before they consider an increase in short-term interest rates.

Treasury and mortgage rates have remained stable for the last few weeks, and the price of oil was up several dollars last week.  That move in oil prices has yet to show up at the pump in a meaningful way.

Last week, we looked at a few elements of Trump’s proposed tax plan.  This week, we take a look at what Clinton is proposing.  Keep in mind that what we wrote last week, and what we write this week, are subject to change anytime either candidate opens his/her mouth, and are certainly subject to all sorts of creativity once Congress starts playtime with said tax proposals.

Regarding personal income taxes, Clinton would increase the number of tax brackets to eight, adding a 43.6% marginal rate, or a 4% surtax, to those incomes of greater than $5 million.  Clinton would also retain the 3.8% surtax on “net investment income”, meaning the top federal rate could reach 47.4%.

Clinton would increase the top rate on capital gains to 47.4%, unless the hold period for the asset was six years.  The 4% surtax on incomes of greater than $5 million would apply, giving a capital gain tax rate of 27.8% on assets held six years or more.  Under Clinton’s tax plan, the benefit of itemized deductions would be limited to 28%.  In 2016, this means that joint filing taxpayers with AGI’s of greater than $231,450 would begin to lose the benefit of itemized deductions.

The Clinton plan would adopt the “Buffett Rule”, meaning that taxpayers with incomes of greater than $1 million would pay a minimum effective rate of 30%.  The estate tax rate would be 45%, and the estate tax exemption would drop from its current $5.45 million to $3.5 million.

Evaluating these changes on tax paying households makes it easier for most of us to breathe.  Until your AGI gets north of $730,000, your tax bill will go up, but will do so only very slightly.  At $730,000 plus, your federal tax bill will go up $80,000.  And, as your income goes up, both the dollars you pay, and the percentage of the dollars you pay, in taxes, increases.  The good news is that, of the 110 million or so households in the U.S., fewer than 1 million of them have incomes at or above this $730,000.

Corporate taxpayers will face an exit tax, if they attempt an inversion.  The attraction of an inversion, meaning relocating your corporate residence to another country, is to escape the onerous U.S. corporate income tax structure.  The U.S. taxes all corporate income which is brought into the country, regardless of where it is earned, whereas most other countries tax corporate income earned just in that country.

Clinton would treat “carried interest” as ordinary income.  Clinton has referenced raising the cap on incomes currently subject to Social Security taxes, but has put nothing in writing. 

What we haven’t discussed, this week or last, is the impact that varying tax rates, at both the household and corporate level, have on the average household in America.  That’s a subject for a different day, if we choose to tackle it at all.  If we jump into the fray, we will include significant supporting references, and encourage you to do your own research.

One more income tax tidbit.  The Tax Foundation, www.taxfoundation.org, has a complete history of U.S. income tax rates available in both nominal and inflation adjusted formats.  In 1913, the first year of the current federal income tax, tax payers with incomes (inflation adjusted to 2013) from $0 to $463,000 paid a tax of 1% of income.  The highest marginal rate in 2013 was 7%, and it applied to (inflation adjusted) incomes of more than $11,595,000.

Note that most of this information comes from The Tax Foundation, and The Tax Policy Institute.  Our encouragement is for you to do your own reading and research, if your tax bill is of interest to you, and track what each of the candidates are both saying and doing.  Taxes are the price we pay for enjoying the privileges of this great land.  Our involvement and engagement as citizens is critical, in order for us to continue to enjoy this great country.

Changing subjects briefly, Pat Gelsinger was a farm boy from Pennsylvania.  In high school, he worked on the family farm, and by his own admission, drifted through school, until he took and aced an electronics technology test.  That experience, the insight he gained, and the decisions he made from it, changed the course of his life.  He worked under Andy Grove at Intel, and is currently CEO of VMware.  It’s a good story, and you can read more of it at http://www.forbes.com/sites/richkarlgaard/2016/06/15/serial-bloomer-pat-gelsinger/#d28502735050.

Quotes of the week:

“The starting point of all achievement is desire.”

                                                                                                Napoleon Hill

“Happiness lies in the joy of achievement and the thrill of creative effort.”

Hillary Clinton photo credit: motherjones.com

Donald Trump photo credit: salon.com

Pat Geslinger photo credit: forbes.com