Your Financial Future Under Obama

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The number one issue for most voters is the Economy and which presidential candidate is best suited to get the nation out of the current economic slump. So based on a recent weekend WSJ article and research from various sources, here is a comparison of the key financial reforms proposed under both candidates and which ones I think will be better suited to navigate the nation away from a potential depression into a relatively mild recession (which we are currently in). Feel free to leave a comment with your viewpoint.

Short-Term Economic Relief. With little end in sight to the current economic slump, both candidates have proposed specific plans on how to jump-start the economy in 2008 and 2009 by providing immediate help to tax payers

Sen. Obama proposes a $1,000 Emergency Energy Rebate to families ($500 for individuals) and penalty-free withdrawals of 15% from 401(k)s and IRAs up to $10,000. He also wants to give businesses a $3,000 tax credit in 2009 and 2010 for every new full-time worker hired.

Sen. McCain proposes cutting the capital-gains rate on stock held for more than a year to 7.5%. He also would increase the amount of stock loss that is deductible against ordinary income from $3,000 to $15,000, and would tax withdrawals by seniors from IRAs and 401(k)s no more than 10%.

Opinion: Obama’s energy and worker rebate should help provide a limited short-term boost. But to me making early 401K withdrawals easier is a bad idea unless in real emergencies, because we are trading our long tern finances for short term relief. Sen McCain’s increased capital loss write-off would be beneficial for a number of investors thanks to the Dow’s 40%+ fall this year. No clear winner here and I think a combination of the two – more rebates and increasing the stock loss deduction is the way to go.
Taxes. I wrote an entire post a couple of weeks back comparing each of the candidates tax plans against the various income brackets. Both have made tax cuts a center piece of their campaign, though have disparate ways of implementing the tax changes. Here is the core of their tax plans:

Sen. Obama favors tax cuts for middle-class workers and tax increases for top earners – families that make more than $250,000 and individuals making more than $200,000 a year. He wants to extend most of the 2001 and 2003 Bush tax cuts, but raise the top two marginal rates to 36% and 39.6%. Sen. Obama wants to eliminate taxes on seniors making less than $50,000 a year and to provide a “Making Work Pay” tax credit of 6.2% of the first $8,100 in wages (about $500) for individuals earning less than $75,000 a year. Outside analysts estimate that the top 1% of wage earners would see an average tax increase of $19,000.

Sen. McCain wants to permanently extend all 2001 and 2003 Bush tax cuts, raise the personal exemption for each dependent from $3,500 gradually over several years to $7,000 and keep the top tax rate at 35%, leaving “upper-income taxpayers” with “the most to gain under McCain’s plan,” according to a report by Deloitte Tax. The nonpartisan Urban-Brookings Tax Policy Center estimates that the top 1% would see a tax cut of more than $125,000.

Opinion: If you have been following the campaigns then the tax reform message is clear, Obama’s plan helps the low to middle wage workers and households the most. While McCain’s favors the above average to higher wage earners. Personally I would be better off a McCain plan, but I think as a nation where the average income is around $40,000 the Obama tax plan will be more effective in driving consumer demand and getting us out of the economic crisis quicker.
Health Care: Not surprisingly with health care costs rising rapidly (estimated to go from $3000 per family last year to $4400 in 2010) and the number of uninsured citizens growing every day, both candidates want to expand access to affordable health care.

 

Sen. Obama proposes income-related subsidies for health insurance through a new national exchange, along with expanded access to Medicaid and the State Children’s Health Insurance Program, and mandatory care for children. He would require employers that don’t offer health coverage to contribute a percentage of payroll toward the national plan, with small businesses being exempt (and eligible for refundable tax credits on 50% of premiums). Under this plan, premium payments for families would fall by about $185 and direct payments for health services by $253. The Lewin Group projects the Obama plan would reduce the number of uninsured by 26.6 million people in 2010, from 48.9 million.

Sen. McCain wants to replace the current income-tax exemption for health-insurance premiums paid by employers with a refundable tax credit of $5,000 per family ($2,500 for individuals). Any unused credit could be deposited into a Health Savings Account. Sen. McCain wants to allow people to purchase insurance across state lines, which could reduce the effectiveness of state regulations. Under this plan, premium payments for families would increase by about $379 and direct payments for health services by about $105. “This would be more than offset by a net increase in tax subsidies of $1,570” and wage gains resulting from employer savings, the Lewin Group says. The Lewin Group projects that the McCain plan would reduce the number of uninsured by 21.1 million people.

Opinion: Based on the Lewin group’s research, Obama’s plan is slightly more comprehensive and offers greater savings for “average” income earners. Business’ and higher income workers would prefer McCain’s plan, but with 70% of our economy driven by consumer spending, any plan that puts real money (and not just tax credits) back in the hands of consumers is one that will have a much more immediate impact. According to a new poll from Harvard School of Public Health and Harris Interactive, 40% of registered voters don’t see either candidate’s health-care plan as better for them. An additional 37% favor Obama’s plan, while 27% choose McCain’s proposals. Despite this I do think McCain’s plan has some long term merit because it decouples insurance fr
om a workers employment so provides more choice and flexibility, while Obama is aiming for a more universal (and standard) coverage

Investments. Both candidates offer plans to support small businesses, but they offer different strategies for capital gains, dividends and retirement savings that will affect all investors.

Sen. Obama wants to eliminate all capital-gains taxes on start-ups and small businesses but raise the top long-term capital-gains rate on securities and qualified dividends from 15% to 20% for families making more than $250,000 a year ($200,000 for individuals). He wants to increase the minimum wage and index the rate to inflation to ensure that it rises every year.

Sen. McCain calls for maintaining the 15% top tax rate on dividends and long-term capital gains. He also proposes reducing the corporate income tax rate to 25% from 35%.

Opinion: McCain’s simpler plan benefits everyone (including big business) more and if he were to add Obama’s CGT elimination for startup’s and small business it would be a great plan to boost investing and business activity.
Retirement & Social Security. Both candidates have moved to temporarily suspend the requirement that people over age 70½ tap their retirement accounts, but neither candidate has offered a substantial long-term plan to overhaul the way Americans save for retirement. Sen Obama wants to use taxes and credits to encourage retirement savings while Sen. McCain favors privatizing Social Security in programs that allow younger workers to place a portion of their payroll taxes into personal accounts invested in the market. Retirement and social security are both complex longer term issues that can (and must) be addressed once the current Economic crisis is resolved.

More than wars and natural disasters the 2008 global economic meltdown has had by far the biggest adverse impact our financial outlook, as shown by the recent consumer confidence index fell 23% to its lowest level in 40 years. The outlook is not much better with the majority of consumers expecting business conditions to worsen and fewer jobs to be available. So it is imperative that the next president address the global economic challenges head on an get America back on the right track. Otherwise we will be telling our kids that 2009 was the year when it went all wrong.

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