The Election, Capital Gains and Roths

  • The 5 pines for a time when presidents didn’t matter much
  • Capital gains pain: Reader might panic-sell her small business
  • Could a capital gains tax increase set off a market crash?
  • Racing for Roth conversions before year-end, but is it wise?
  • NYC’s food curfew: Confusing viruses with vampires
  • Skepticism of government becomes “COVID denialism” (Sigh…)

“Heavy law enforcement presence, including National Guard,” says an alert describing the scene in Cleveland, site of the presidential debate tonight.

Of course, that’s how it goes wherever a U.S. president travels, whoever he might be. Normal life must shut down for the imperial leader’s benefit. Nearly a decade ago we were slightly agog at the $1.1 million armored bus that wheeled Barack Obama through a small town in Minnesota.

When a president travels overseas, “It’s standard operating procedure to rent three full floors of the hotel that the president stays in, so that there are only Americans or unoccupied rooms above and below him,” former U.S. diplomat Peter Van Buren said in a recent podcast interview with our acquaintance Scott Horton.

But that’s how far these United States have drifted from their small-government origins — a time when the British ambassador to Washington would knock on the door of the White House and President Thomas Jefferson answered it himself, in house slippers.

Imagine a world where the president is such an inconsequential figure…

Instead, we live in a world where one of our readers is pondering selling her small business on the mere possibility the Oval Office will have a new occupant come January.

“I watched Biden's Black Economic Summit this past week,” she writes. “At about 22 minutes in on the Fox News video, he stated he will raise capital gains taxes to 39.6% because ‘there was no sweat off anyone's brow’ in making money as capital gains.

“Ummm, excuse me? I am an entrepreneur/small-business owner who has spent 35 years sweating, crying, missing family functions, losing sleep and developing stomach ulcers so that I have something worth selling at the end of my career.

“I don't get a nice, fat retirement pension or permanent health care, unlike government workers and politicians. I depend on the sale of my business to carry me through retirement. I AM OFFENDED!

“I must sell my business before the end of 2020 just in case Biden somehow wins this fiasco. Otherwise, I will be giving half my earnings to the government and the state of New Jersey (which is also threatening higher capital gains taxes due to their fiscal mismanagement).”

Indeed, while Biden would leave most of the Trump tax cuts in place for individual taxpayers, that capital gains increase could be a humdinger for high earners.

Per an analysis by the Tax Foundation, the Biden plan “taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million and eliminates step-up in basis for capital gains taxation.”

The top rate right now is 23.8%. So we’re potentially looking at the biggest increase in capital gains taxes in history.

It’s not just small-business owners potentially racing the clock to sell. It might also be large numbers of stock investors.

A very mainstream research paper — from an economist at the U.S. Congress Joint Committee on Taxation and a senior fellow at the Urban-Brookings Tax Policy Center — pulls apart the market impact of two previous increases in the capital gains tax.

1986: The top rate jumps from 20% to 28% under the Reagan-Rostenkowski “reforms.” Sales of stocks and other assets surge 60% in the months before the increase

2012: The top rate jumps from 15% to the present 23.8% as part of the Obama-Boehner effort to avert the “fiscal cliff.” Again, asset sales shoot up 40% in anticipation of the changes.

A columnist at CNBC’s website did some back-of-the-napkin math and concluded that Biden getting his way “could lead to a 45–50% increase in capital gains sales, which could create a large downward force in the market.”

But here’s the crazy thing: Don’t confuse “downward force” with “a crash.”

Granted, we’re working with a limited data set here, but once the tax increase becomes law… a broad rally sets in.

Ronald Reagan signed the capital gains increase into law on Oct. 22, 1986. The S&P 500 sailed 30% higher over the next 10 months; the 1987 crash occurred for reasons that had nothing to do with the tax increase.

In the more recent case, Congress passed the capital gains increase on Jan. 1, 2013. The S&P 500 ended the year 30% higher.

Of course, we can’t dispense personal advice… so we leave it to your own devices whether to sell a big winner and book gains before a higher rate potentially kicks in. If you’re that well off in your stock portfolio, best consult a tax professional.

Unfortunately, our small-business owner is in a different pickle. Calculating capital gains when selling a business is wicked complicated — and that’s by the IRS’ own admission. "The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. [Emphasis ours].”

Good luck is all we can say…

Elsewhere, we see many investors “have been converting their retirement accounts to Roth IRAs because they anticipate higher taxes under a Biden administration,” says our investment banking veteran Nomi Prins.

Nomi points us to a recent MarketWatch article profiling accountants and tax planners whose clients aren’t waiting for an election result the night of Nov. 3 — or conceivably much later.

Already this year, an advisory firm in the Chicago suburbs has converted about 50 conventional IRAs to Roths. Better, those clients figure, to pay the taxes now at current rates rather than later at higher rates.

Makes sense, up to a point.

But we also wouldn’t rule out the possibility of a future administration deciding to change the rules in the middle of the game and taxing the gains on your Roth. Or, at the very least, imposing required minimum distributions like a conventional IRA — forcing you to put a chunk of your Roth money back in a taxable account, year after year, once you reach age 72.

Again, we can talk about this subject only in broad strokes. Taxes are a highly individual thing. As newsletter editors, our team is much better equipped to make stock and option recommendations. At best, someone like our income specialist Zach Scheidt can tell you whether a certain name is better suited for a taxable or a tax-advantaged account.

But we also owe it to you to give you a general heads-up on taxes. We’re fairly certain this won’t be the last one between now and Election Day.

After two days of big rallies, the major U.S. stock indexes are stuck in neutral.

At last check, the S&P 500 is literally unchanged from yesterday’s close of 3,352. The Dow and the Nasdaq are fractionally in the red.

Gold continues its climb back to $1,900 — now less than $10 away. Silver has already reclaimed the $24 level. Crude has sunk back below $40.

The only economic number of note is the Conference Board’s Consumer Confidence Survey. At 101.8, the September figure is up sharply from previous months… but it remains about 30 points lower than it was at the start of 2020.

A couple of months after the “Cuomo Chips” fiasco, New York’s busybody bureaucrats have a new edict to enforce — except they’re getting pushback in court.

Call it the food curfew. At a time when 90% of New York City restaurants can’t keep up full rent payments, they can finally reopen for indoor dining tomorrow — but with limits not only on capacity but also on hours.

Per a lawsuit filed by a Brooklyn eatery called The Graham, the rules are “requiring that New York City restaurants close by midnight each night, despite the fact that coronavirus does not behave as a vampire, infecting others only when the moon is out.”

The Cuomo administration responds by saying late-night service can “encourage individuals to gather and mingle, increasing the risk of COVID transmission.”

The lawsuit already anticipated that line of argument: A midnight closing time "actually makes the situation worse, as shrinking the hours during which New Yorkers can get a meal will result in more crowding during the fewer remaining hours."

Ooh, what does “the science” say about that? Can’t wait to see all the double-blind peer-reviewed studies to back up the state’s case.

Which perfectly tees up today’s mailbag…

“You are so eaten up with dumbass,” a reader writes. That’s literally all the reader said.

But we figure another reader, an MD, is elaborating on her point: “Give me a ****ing break, Dave. First, you criticize others for being ‘armchair epidemiologists’ and then you compare the pandemic to the Iraq War. On which planet do you reside?

“Yes, the experts were wrong in January and February. In case you hadn’t noticed, SARS-CoV-2 is a novel virus. As such, not unexpectedly, the ‘experts’ knew very little in the beginning.

“Perhaps you are amnestic, but thanks to Trump’s inattention, there wasn’t enough PPE even for health professionals. I’m a physician, and I know that for a fact — it’s not fake news. How can you and the WSJ (the print version of Fox News) even suggest that lockdowns were/are an ‘overly blunt and economically costly tool’? If everyone’s dead or sick, there won’t be an economy!

“Trumper, I want to remind you: over 7 million cases and over 200,000 deaths. That ain’t the flu, mi amigo.

“The ONLY similarity between the Iraqi War and COVID-19 is that two ignorant presidents made ill-advised and catastrophic decisions.

“I didn’t sign up for political drivel, so stick to the markets when you are out of your area of knowledge.”

The 5: Nice try, but we were never in the “It’s just the flu, bro” camp.

Way back on Feb. 24 we were wondering what was taking the WHO so long to label the outbreak a pandemic. (It didn’t happen till March 11.)

Nor are we “Trumpers.” This is an antipartisan e-letter with contempt for politicians and bureaucrats of all stripes. Even now. (Especially now.)

PPE shortages? Plenty of blame to go around there, particularly the FDA. We documented some of that in late March as part of a laundry list of government failures. Oh, there’s a dig at Trump in that issue of The 5, come to think of it. Here’s another, right now: Why didn’t he fire anyone at the FDA — or at the CDC for its epic testing failures early on?

“The ‘experts’ knew very little in the beginning?” Why, yes, we acknowledged that over the summer. We also said you don’t issue sweeping mandates affecting the fate of hundreds of millions on an untested hypothesis.

Back to New York City: Earlier this month, the 9/11 Memorial Museum reopened to the public… on Sept. 12, a day after the 19th anniversary of the attacks.

“A symbolic day for sure but one with no science behind it,” writes the aforementioned Peter Van Buren in The American Conservative.

“Why not Sept. 3 or 24? Because it doesn’t matter… And the museum, with its cavernous interiors (it is built into the basements of the old Twin Towers) is allowed to host only 25% of its capacity. Same for every other museum in NYC, 25% whether they have state-of-the-art HVAC systems and thousands of square feet or are contained within early-19th-century parlors. It doesn’t matter because it doesn’t matter; there’s no science behind it because there is no serious threat behind it.”

We wouldn’t go so far as to say there’s no “serious threat.” We continue to belong to this vanishingly small subset described here five months ago…


But when the control freaks and power trippers issue one preposterous decree after another — special mention for Gov. Queen of Hearts in Michigan is again deserved — is it any wonder COVID denialism is so widespread?

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. As we go to virtual press, it’s now official: JPMorgan Chase will pay a $920 million cost-of-doing-business fine for its precious metals manipulation. As we pointed out last week, that’s less than 1% of JPM’s annual revenue. And the beat goes on…

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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