Financial ramification on the economy
Since most of the tax increases don't kick in until 2013, and most of the mandates don't kick in until 2016, I don't see doom and gloom on the economy. I believe that we're on the front of a massive global expansion. Health care spending is obviously a decision that our elected officials have made; this may cost businesses, but that can always be adjusted in the wages paid to workers (in other words, you get health care instead of more pay). Capitalism is resilient.
Financial ramification on taxes
The Bill increases taxes on households with income over $250,000. The first big increase is that in 2013, the Medicare tax rate for the over-$250,000 household goes from 1.45 percent to 2.35 percent. A 3.8 percent Medicare tax will be introduced for the over $250,000 on investment income. For 2011, the capital gains rates are expected to rise to 20 percent on households with AGI over $250,000. Add in the Medicare tax, and you have an effective rate of 23.8 percent on long term capital gains in 2013.
The current long term capital gains rate is 15 percent, so capital gains tax rates are prospectively increasing by about 58 percent. The amount received after taxes from a capital gain goes from 85 percent to about 76.2 percent, a 10.4 percent reduction in cash flow. This makes capital gains less attractive.
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What's the effect on stocks? Half the stocks are owned by households under $250,000 and half are owned by non-taxable accounts (so roughly one-quarter are owned by high-income individuals in taxable accounts). We see the prospective effect on stocks to reduce the value by 2.6 percent, not enough to warrant bailing on stocks. Bonds don't fare any better: right now, with the maximum rate on taxable interest (like the 0.7 percent you're making on your bank account) is 35 percent. If we look at the 2011 changes (expiration of the Bush tax cuts), then add in the Medicare tax in 2013, the new rate will be 43.4 percent.
One investment spot that will benefit is municipal bonds. For example, take a municipal bond with a yield of 3.8 percent. To a taxpayer in the 35 percent bracket, this is the equivalent of a 5.8 percent taxable bond (more if it's a state specific bond). Under the probable new rules in 2013, the taxable equivalent yield on that same municipal bond will be 6.71 percent. The municipal bond is worth 15.7 percent more to the high bracket individual.
Financial ramification on drug companies
Drug companies seem to clearly benefit from the Bill; there is an excise tax on medical devices of 2.9 percent. Drug companies also now get protection from generic drug manufacturers as well. In addition, the Bill pretty much expands coverage without really cutting costs, so medical care companies and drug companies now have a bigger pool of customers. I really don't think the physicians will benefit as much as many seem to think they will.
What is the bottom line? This Bill did nothing to contain costs. It didn't reform the medical malpractice rules (which probably cost about 10 percent); it kept the drug companies on long patents and protected them from generic manufacturers; it ignored the most expensive part of medical care: the last year of life; it ignored the premise of preventative health care; there's nothing to encourage the consumer to save costs. The United States spends about 16 percent of our GDP on health care, 45 percent more than the country which has the next highest spending (France). Our life expectancy is 38th in the world; maybe a better approach would be getting people to take care of themselves as a health care measure.
LJPR LLC is an independent wealth management firm headquartered in Troy, Mich. For over 20 years, LJPR has been reducing uncertainty for their clients' finances by providing creative wealth management solutions in investments, taxes, financial planning and estate planning. For more information about the firm, including the firm's blog, visit their site, http://ljpr.com or call 248-641-7400. Leon LaBrecque can be reached at [email protected].
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