The end is almost in sight for the election of a US President and as voters prepare to choose whom they want in the White House, here are some thoughts from the wealth management industry around how they might be affected.

Wealth managers are trying to peer through the fog of a bitterly contested US presidential election to see if they will face a surge of work in advising anxious clients on how to mitigate the impact of tax hikes, or cope with whatever comes if Trump were to cut them.

Much depends on whether the Senate and House of Representatives swing to the Democrats’ or Republicans’ favor. Assuming that the result yields any decisive power swing to the Democrats, with Senator Clinton in the White House and a Democrat-leaning Congress, that could spell tax hikes of some extent. On the other hand, a Donald Trump win and maintenance of control of Congress for the GOP could see tax cuts, not just for high earners.

Lester Law, who is managing director at Abbot Downing, the ultra-high net worth business of Wells Fargo, and a leading figure in tax and estate matters at the American Bar Association, says if Sen. Clinton comes into office, the likelihood of her being able to translate her desires for higher, “fairer” taxes on the rich will be “small”. Much depends on who retains control in the Senate and House after an election, he said. “If Senator Clinton comes in then there might not be a lot of movement on taxes in the short-term,” Law said. "The bitterness of the election would suggest that whatever the outcome, co-operation between the executive and legislature on tax will be very difficult to achieve."

According to a briefing note from Chicago-based attorneys Handler Thayer LLP, for example, the candidates offer “vastly divergent estate and gift tax proposals”. Democratic candidate and former Secretary of State Hillary Clinton proposes changes that would take more in transfer taxes from wealthy persons, not just immediately but over time, the firm said, adding that the long-term effect is the elimination of the inflation adjustment to the gift, estate, and GST Tax exemptions.

As for Trump, he “proposes to fully eliminate the gift, estate, and GST taxes”, the note continues.

Handler Thayer noted a similar change to that proposed by Trump was enacted once before, under George W Bush in 2002, but it used a gradual seven-year phase-out, with estate taxes (but not gift taxes) disappearing for only one year: 2010.  

“The `snap-back’ restoration of the estate tax was built in to that legislation for budgetary reasons, but many were surprised when Congress failed to enact a restoration of the tax in late 2009 in time to prevent that one-year appeal. Congress did act to restore the estate tax in 2011 with an even larger exemption of $5,000,000, rather than revert back to the 2001 exemption of $1,000,000,” the firm said. It added: “Although Trump has not been specific on the subject, we know from the 2009 experience that when there is no estate tax, there is much less justification for the step-up in tax basis upon death. In 2009, each estate received a `free’ $1,000,000 of basis step-up to allocate to assets in the estate, but otherwise heirs and beneficiaries took the decedent’s carry-over basis (or no basis at all if basis could not be established).  This will make gifts of appreciating assets even more powerful if there will be no basis step-up.”

In Clinton’s proposals, she proposes to take tax exemptions from the current $5.45 million level to the 2009 level for gifts ($1 million), estates ($3.5 million) and GST tax ($3.5 million). Other moves include removing inflation adjustments, hikes to base rates, and limits on exemptions on estate taxes.

Wealth out of favor
Ironically, considering that Trump makes much of his billionaire status and Clinton is well-off, this election happens against a backdrop of resentment about great wealth in the aftermath of the financial crisis of 2008. Unless wealth owners display a clear benefit to wider society and economy from their activities, such as with certain entrepreneurs, or ally their work with philanthropy, they come under pressure. Wealth managers “should focus clients on being better investors and not being so tax-orientated,” Abbot Downing’s Law said.

That the mood has shifted is not in doubt, even if some of the rhetoric is way off-base. Last year, the top one per cent of income earners made 13 per cent less than they did in 2007 before the recession (sources: Daily Telegraph UK, Emmanuel Saez, Berkeley). The bottom 90 per cent made around 8 per cent less, suggesting a shrinkage in the wealth gap. It can also be argued that such data doesn’t account for government benefits, which when added in, reduce inequality further. Inequality fell 5 per cent in 2013, according to latest figures (source: Congressional Budget Office). However, even if the actual figures belie the political narratives of those claiming rising inequality, it is hard for politicians with their eyes on the polls to combat it easily. (To see an editorial comment over claims and counterclaims over inequality, click here.)

Senator's Clinton’s desire to push up taxes on the wealthiest is driven by the kind of reasoning renowned US investor Warren Buffett used to claim that he paid a lower rate of tax than his secretary, Law said.
(Buffett claimed that taxes on capital appreciation should be higher because at the time he made the claim, in 2013, capital gains on dividends were taxed at 23.8 per cent compared to 39.6 per cent for wages at the top rate. Critics of Buffett said this was not a fair point because it did not account for how the company paying the dividend to the investor must pay taxes on those same dividends. In other words, the total tax rate on dividends, to take this example, would be 50.47 per cent, which is higher than the top marginal rate on wages.)

In Trump’s case, said Law, he was in some ways producing an echo of the sort of supply-side tax cut rhetoric used by the late Ronald Reagan. Reagan, influenced by politicians and economists such as Jack Kemp and Arthur Laffer, argued that lower marginal rates and a fewer distortions to a tax code produced more revenues than higher taxes over time.

(Editor’s note: This publication, as FWR readers will see, has avoided giving an editorial opinion on the this election, not simply because it does not see itself as wishing to take a partisan stance but also because a specialist news service such as this does not have insights to add on many of the non-wealth industry issues in this campaign. What can be said is that the health of the wealth management industry ultimately depends on a vibrant, free market economy that nurtures entrepreneurship over the long term, and that it is to be hoped that whoever wields power in Washington DC remembers that.)