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The views and opinions expressed in this presentation are those of the author and presenter and do not necessarily reflect the views and opinions of the sponsoring

companies or their affiliates.

Disclosure

Neither Andrew Friedman nor Jeff Bush is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended and may not be regarded as legal or tax advice, and financial advisors and other recipients of this information may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Advisors should consult with their firm’s legal and tax counsel as to matters discussed herein. Clients should consult their own legal and tax counsel before entering into any investment, annuity, estate planning, or trust arrangement, and financial advisors should advise their clients to do so.

Copyright Andrew H. Friedman 2017. Printed by permission. All rights reserved.

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2016 Election

“I remember when I was The Donald!”

Income Inequality

“Economic disparities appear to be reaching extremes that are damaging to growth.”

Standard & Poor’s (August 2014)

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• The concern: Income inequality is increasing.

• Wealth begets more wealth.

Market return since 2015: 250%

Wage increase since 2015: 15%

• Middle class is no longer the nation’s majority.

Sources: CNBC Nightly Business Report (March 9, 2016); 5 facts about economic inequality Pew Research Center, (Jan., 2014); The American Middle Class Is Losing Ground, Pew Research Center (December 2015).

Income Inequality

• Percent of income earned by top income earners.

1980 2015

One percent 8% 19%

Ten percent 32% 45%

• 2015 figures are down slightly from 2012, which were the highest levels ever recorded.

Source: Fairness and Tax Policy, Joint Committee on Taxation (March 2015).

Income Inequality

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• Government programs are necessary to reverse income inequality.

- Higher minimum wage

- Education programs

- Jobs programs

- Unemployment insurance

• Fund government programs with higher taxes on the affluent, who have gained economically in recent years.

Income Inequality – Democrats

• Focus on stronger economic growth, not bigger government.

• Reduce programs and regulations that hamstring business growth.

- Government intrusion thwarts economic growth and individual perseverance.

- Government subsidies dis-incentivize working and foster dependency.

Income Inequality – Republicans

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• The tax system is already unduly progressive. Increasing taxes thwarts economic growth and entrepreneurial spirit.

• Percent of taxes paid (percent of income in parentheses).

1980 2015

One percent 19% (8%) 49% (19%)

Ten percent 49% (32%) 82% (45%)

Source: Fairness and Tax Policy, Joint Committee on Taxation (March 2015).

Income Inequality – Republicans

• Lower taxes

- Consequence: less government revenue with dynamic scoring

• Reduce government regulation of businesses

- And reduce size of government

Trump’s Plan

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• Republican Congress

• Reverse Obama executive orders

• Checks on Trump power:

- Senate filibuster rules (use of reconciliation procedure)

- Deficit hawks in House

Trump’s Power

Trump Budget Proposal FY2018

• Increases defense spending by 10% ($54B).

• Reduces domestic spending by the same amount (10% cuts).

- Largest single reduction in spending since aftermath of WWII.

- No cuts: Homeland Security, Veterans Administration, entitlements.

- Largest cuts: EPA (31%), State (29%), Agriculture (21%), Labor (21%).

• Trump also has proposed $1T infrastructure repair / jobs program.

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Federal Spending – FY2018

• Government is funded through September 2017. Congress will write its own budget for FY2018. Democrats, and some Republicans will push back against Trump cuts.

• Congress then will seek to pass appropriations bills based on its budget.

- Passage of appropriations bill will require 60 votes in Senate.

• Congress also must raise debt ceiling this Fall to allow government to continue to borrow.

Tax Reform

“This [preparing my tax return] is too

difficult for a mathematician. It takes a

philosopher.”

Albert Einstein

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Tax Reform

“We have what it takes to take

what you have.’’

Unofficial Motto of the Internal Revenue Service

• Must eliminate or cap some “sacred” deductions and exemptions to recoup revenue lost from reduced tax rates.

- Dynamic scoring makes revenue neutrality easier.

- Repealing ACA taxes before tax reform reduces amount needed for revenue neutrality.

Tax Reform – Stumbling Blocks

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Tax Reduction - Individual

• 35% top individual rate

• 20% top cap gain and dividend rate

• Double the standard deduction

• Repeal Obamacare 3.8% surtax

• Eliminate alternative minimum tax

• Repeal estate tax and GST

- Repeal stepped up basis for large estates?

Tax Reduction - Individual

• Eliminate all itemized deductions other than for mortgage interest and charitable contributions

• Loophole closers

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Tax Reduction – Business

• 15% top tax rate on business income, including through

pass-through entities. (House plan would adopt a 20% rate

for C corporations and 25% rate for pass-through entities.)

• Full expensing of capital expenditures (House)

• Eliminate deduction for interest expense (House)

• Tax sale of carried interest as ordinary income

Tax Reduction – Business

• Repatriation holiday for existing offshore subsidiary earnings

(rate TBD)

• No tax on repatriation of future offshore earnings

• “Border adjustments” (House): Export sales not taxable,

import expenses not deductible

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Tax Reduction

“Simply put, any policy proposal which drives

up costs of Corona, tequila, or margaritas is a

big-time bad idea. Mucho Sad.”

Senator Lindsey Graham (R-SC)

(February 2017)

Tax Reduction – Prognosis

• Republicans can use reconciliation to pass tax legislation without Democratic support.

• Tax reform will have winners and losers, as changes to deductions and exemptions fall unevenly across economic sectors, businesses, and individual taxpayers.

• If full-scale tax reform fails, Republicans may pass streamlined legislation that simply reduces tax rates.

- Uncertain if tax cut legislation will be revenue neutral.

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Trump Foreign Relations

• “America First” policy: “peace through strength”.

- Focus on Defense Department rather than State (diplomacy).

• Rejection of globalism, which has hurt American workers.

• Focus on domestic growth, not foreign involvement to spread democracy.

• Support nation’s right to protect borders.

• Bilateral rather than multinational treaty negotiations.

Trade

“[The problem is] more and more of our

imports are coming from overseas.”

President George W. Bush (2000)

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• Tariffs on imported goods

• Push back from House Republicans

• Executive action:- Counter currency manipulation

- Correct balance of payments

- Protect domestic industries injured by imports

- National emergency or national security

• Negative effect on economic growth?

Trade

• To assure coverage of pre-existing conditions, law must require or encourage healthy people to purchase insurance.

- Otherwise insurers must raise premiums substantially or decline to participate.

• Republican bill (AHCA) eliminates individual mandate penalty and replaces ACA subsidies with refundable tax credits to be used in private markets.

• States may opt out of essential benefits covered and pre-existing condition premium limits by establishing high risk pools.

Obamacare – Replacement Challenges

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• CBO: Republican plan would increase premiums by 15%-20% in first year. Older Americans would pay “substantially” more, and younger Americans less.

• Conservative Republicans concerned that refundable tax credits essentially continues ACA entitlement program. Moderates concerned that premiums will increase and sick people in opt-out states will be unable to afford coverage.

Source: Congressional Budget Office Cost Estimate, American Health Care Act (March 13, 2017)

Obamacare – Replacement Challenges

• Many states have expanded Medicaid coverage, greatly increasing federal outlays.

- AHCA would repeal state option to extend Medicaid coverage to enrollees up to 133% of poverty level (with grandfathering for existing enrollees).

- CBO: 14M fewer insureds after one year and 24M fewer after ten years (52M vs 28M uninsured; 19% vs 10% of population).

- Moderates concerned low income constituents losing coverage.

Source: Congressional Budget Office Cost Estimate, American Health Care Act (March 13, 2017)

Obamacare – Replacement Challenges

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• Filibuster prevents changes unrelated to taxes or spending.

- Reconciliation can be used to undermine fiscal underpinnings, but Senate Democrats can filibuster changes that do not relate to revenue.

Obamacare – Replacement Challenges

Financial Services

• Filibuster prevents full Dodd-Frank repeal.

• Trump executive order calls for sweeping review of Dodd-Frank regulations and enforcement with an eye toward removing impediments to “economic growth and vibrant financial markets and enabling American companies to be competitive.”

• But note: Trump ran as a populist against “crony capitalism” and so could make comments adverse to Wall Street interests.

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Financial Services – DOL Fiduciary Rule

• Trump executive memorandum states that rule “may not be consistent with the policies of my Administration.”

- DOL is to consider whether the rule adversely affects access to financial advice and product offerings, results in disruptions within the industry, or causes increased litigation and prices. If so, DOL is to rescind or revise the rule.

• DOL has proposed extending the effective date by 60 days (to June 9) to give it time to reconsider rule.

Financial Services – DOL Fiduciary Rule

“The rule’s intent may be to provide retirees with better financial advice, but in reality it has limited the financial services available to them. This is exactly the kind of

government regulatory overreach the President was put in office to stop.”

White House Press Secretary Sean Spicer (February 2017)

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Energy

• Goal: U.S. energy independence.

• Expanded exploitation of conventional energy sources. Climate change is not a concern.

• Repeal Obama environmental regulations limiting fracking; carbon emissions on power plants; and oil, gas, coal extraction.

• Boost for fossil fuels: oil, natural gas, coal, shale.

• Boost for domestic production: offshore drilling, drilling on federal lands, stalled pipeline projects.

Fiscal Realities

Source: The Budget and Economic Outlook: Fiscal Years 2016 to 2026, Congressional Budget Office (Jan 2016)

-6

-5

-4

-3

-2

-1

02015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Annual Deficit as a % of GDP

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Mandatory Programs(Entitlements) $2,429 (63%)

Interest$241 (6%)

Defense$584 (15%)

Domestic$600 (16%)

Source: The Budget and Economic Outlook: Fiscal Years 2017 to 2027, Congressional Budget Office (Jan 2017)

Fiscal Realities 2016 Federal Spending ($3.9T) (in billions of dollars)

Economic and Market Consequences• Fiscal stimulus, tax reform, reduced federal regulation should be

favorable for economy and markets. Possible modulating effects:

- Congressional curtailment of spending could disappoint markets.

- Trade policy is wild card.

- Inflation could be a concern; higher interest rates.

- Trump unpredictability could cause concern.

• Longer term deficit growth could cause over-borrowing.

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Economic and Market Consequences

• Corporate bond supply may be lowered by:

- Repatriation holiday (source of cash)

- Disallowance of interest tax deduction

- Higher interest rates

Favorable Market Sectors

• Domestic industrials (infrastructure, expensing)

• Traditional energy (oil, coal, pipelines)

• Defense (defense build-up, expensing)

• Financial services (less regulation, higher interest rates)

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Uncertain Market Sectors

• Pharmaceutical / Health care / Health insurers

- Faster FDA approval (+)

- Trump comments on drug price increases (-)

- Medicare negotiation of drug prices (-)

- Reduced ACA insurance (-)

Uncertain Market Sectors

• Technology

- No benefit from lower tax rate

- Tariff / border adjustment effects on supply chain

• Retail / Consumer discretionary

- Lower tax rate (+)

- Border adjustments (-)

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Tax Planning

• Protect against future tax volatility with flexibility to withdraw from taxable and tax-deferred accounts and investments.

- Asset location as well as asset allocation.

- Three buckets: taxable, tax-free and tax-deferred.

• Diversify sources of income generation.

- Municipal bonds, annuities, life Insurance, MLP’s, tax-efficient mutual funds, pre- and post-tax retirement plans.

To stay current:

TheWashingtonUpdate.com

from Andy Friedman@TheWashUpdate

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The views and opinions expressed in this presentation are those of the author and presenter and do not necessarily reflect the views and opinions of the sponsoring

companies or their affiliates.