Anticipated end-of-year tax increases, though bad for the economy, will be a positive for life insurance and financial service professionals advising clients on tax avoidance strategies.
So noted a team of experts with Toronto-based BMO Financial Group, which hosted a conference call on Wednesday for journalists to explore the implications of President Obama’s election victory on Tuesday.
“Tax avoidance will return as an investment strategy, with less productive uses of capital,” said Andrew Busch, a Chicago-based global currency and public policy strategist at BMO Capital Markets. “When you tell upper income earners that you’re going to raise their taxes to 39.6% from 35% and raise taxes on capital formation and investment, then people will adopt strategies to avoid paying taxes.”
Jack Ablin, chief investment officer of BMO Private Bank, agreed.
“To the extent that life insurance plays a critical role in tax avoidance strategies for estate tax and other tax-related issues, [President’s Obama's victory] could present a much bigger opportunity and expanding role of life insurance,” he said. “Between life insurance and municipal bonds, it would seem those would be favorably impacted by the election results.”
Busch warned that investor concerns about the approach of the fiscal cliff—the combination of expiring tax cuts and across-the-board government spending cuts which, scheduled to become effective Dec. 31, 2012, threatens to send the economy back into a recession—could prompt credit rating agencies Fitch and Moody’s to warn that, absent Congressional action, they intend to downgrade U.S. debt. But the end-of-year tax deadlines, he noted, could also work to the Democrats’ advantage.
“The Democrats see a clear advantage to going over the cliff,” he said. “In January, once the Bush tax cuts have expired, Democrats would be free to draft their own plan to cut taxes for the middle class and not the wealthy—and to dare Republicans to reject their plan.