The conventions are history and the campaign has swung into high gear. For the high and upper high net worth clients of wealth managers, the fiscal consequences of the 2012 US presidential election are unusually stark.

The conventions are history and the campaign has swung into high gear. For the high and upper high net worth clients of wealth managers, the fiscal consequences of the 2012 US presidential election are unusually stark.

If President Barack Obama is re-elected, he wants to raise the marginal tax rate on married couples with income above $250,000 and singles with income above $200,000 from 33 per cent to 36 per cent and from 35 per cent to 39.6 per cent, respectively.

Based on his last budget proposal in February 2010, President Obama also wants to phase in the “Buffett Rule,” a minimum tax rate of 30 per cent on taxpayers with income over $1 million.

In sharp contrast, Republican presidential candidate Mitt Romney, the former governor of Massachusetts and chief executive of the private equity firm Bain Capital, wants to cut all individual rates by 20 per cent, reducing the top tax rate from 35 per cent to 28 per cent.

Capital gains and dividends in crosshairs

For the wealth management business, the most significant difference between the two candidates is the potential change in the rate that capital gains and dividends are taxed at, according to Tim Steffen, director of financial planning for Milwaukee-based RW Baird & Co’s private wealth management group, and author of the report Where the Presidential Candidates Stand on Financial Issues.

For higher income taxpayers (couples with income over $250,000 and singles with income over $200,000) President Obama would raise the long-term capital tax rate from 15 per cent to 20 per cent. Qualified dividends for those taxpayers would be taxed as ordinary income, which, combined with his other proposals, would result in tax rates of 36 per cent or 39.6 per cent.

Obama would also maintain the new 3.8 per cent Medicare tax on investment income included in the 2010 Affordable Care Act, which would boost the top tax rate on long-term capital gains and dividends to 23.8 per cent and 43.4 per cent, respectively.

Clear differences

Again, Romney’s proposals are strikingly different. He would maintain the current 15 per cent top rate of qualified dividends and long-term capital gains for higher income taxpayers, and eliminate the 3.8 per cent Medicare tax on investment income by repealing the health care act.

“The overriding difference between the two candidates position on taxes is very clear,” Steffen said. “Romney wants tax benefits for all and Obama wants tax cuts for some, paid for with tax increases on others.”

President Obama has also proposed capping the tax benefit of municipal interest at 28 per cent. For those in the top two tax brackets, that effectively creates a tax of 8 per cent or 11.6 per cent, assuming their marginal tax rates are also raised.

Nonetheless,  the potential tax increases on wealthy investors could make municipal bonds “more attractive, assuming that income can still be shielded,” said Brian Rehling, chief fixed income strategist for Wells Fargo Advisors, and co-author of the firm’s recent report The Elections: What’s At Stake for the Economy and Your Wallet.

Estate tax: raise or repeal?

Contrasting approaches to the estate tax is yet another major difference between the two candidates impacting wealth managers and their high and ultra high net worth clients.

President Obama has proposed an estate tax exemption of $3.5 million and a top tax rate of 45 per cent. As Steffen notes in his report, this compares to the current $5 million exemption per individual ($10 million for a married couple) and 35 per cent top rate, which is set, under current law, to become only a $1 million exemption next year with a top tax rate of a whopping 55 per cent.

Governor Romney’s position couldn’t be more dissimilar: he wants the estate tax to be completely and permanently repealed.

Winner may not take all

Yet for all the attention that the differences between the candidates has generated, there is no guarantee either man’s agenda will be implemented, no matter who wins.

For starters, the Bush tax cuts are scheduled to end on January 1, opening the door for possible last minute Congressional action after the election. And all subsequent legislation, of course, must be passed by the new Congress. Republicans, who control the House of Representatives and have nullified the Democrat’s majority in the Senate by using the filibuster, have already blocked any major initiatives by the president, and show no signs of becoming more accommodating next year, especially if they maintain or increase their numbers despite an Obama victory.

Romney faces a different problem. Even if he wins and the Republicans control both the House and the Senate, he hasn’t explained how exactly he would pay for his tax cuts, other than to say he would target “some of the loopholes and deductions at the high end.”

But in order to raise the billions of dollars necessary to offset the lost revenue from tax cuts, the most obvious tax breaks, or tax “expenditures,” to target would be the home mortgage interest deduction, which costs the Treasury nearly $100 billion a year; the deduction for charitable giving, which accounts for over $50 billion, and investment income protection.

Each of those expenditures is extremely popular and has powerful constituencies and interest groups who will fight tooth and nail to protect them, no matter which party is in office.

“To pay for his proposals, Romney would have to reduce or even eliminate existing tax preferences,” Steffen said, “and right now that’s a problem because we don’t know the specifics.”

(Part two of this series, to follow tomorrow, will examine the impact of the election on wealth managers.)