What we know about Clintonomics


November 15, 1992|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

New York -- It rarely makes sense to rearrange your finance just because the White House changes hands. You never know what a new president will do, or when he'll do it.

We of the media interview the experts, who speculate. But the smart investor watches and waits. You should act only on what Bill Clinton specifically says he'll do, not on what observers hope, or fear, he'll do.

zTC Here's the rundown of what we know now:

* Taxes. After the flip-flop on read-my-lips, it's hard to trust any president on taxes. But Clinton says he's gunning for only people whose incomes exceed $200,000.

It is not yet clear whether that rate is for couples, individuals or both.

Still, there's no need, right now, for the average person to worry about tax rates going up. I'd guess, however, that Clinton's pledge covers only income-tax rates. He has backed some loophole-closing, as well as an increase in Medicare premiums for beneficiaries whose incomes top $125,000.

Clinton also campaigned on some form of middle-income tax cuts and gave a nod to a higher earned-income tax credit for the working poor. What these might be worth, if passed, is anybody's guess. The anybodies I spoke with estimated $55 to $150 per family. Given the size of the federal deficit, one has to ask whether this tax cut is really worth it.

The maximum tax on capital gains now stands at 28 percent and isn't likely to rise. Clinton talked about cutting the rate for small businesses, but there's nothing to act on until you see a proposal in print. Tax-shelter specialists will be trying to convert higher-taxed income into capital gains. But tax changes passed in 1986 make shelters harder to create.

* Tax avoidance. The president-elect wants a federal tax rate of 36 percent on adjusted gross incomes over $200,000, up from 31 percent today.

And he says he'd add a 10 percent surcharge on millionaires. Wealthy taxpayers can't entirely dodge the bullet, but neither do they have to take it straight in the heart.

To cut taxes on earnings, put as much of each paycheck as you can into tax-deferred Keoghs, 401(k) plans and other retirement savings accounts. To protect interest and dividend income, look at tax-deferred annuities (especially if you're middle-aged), tax-exempt municipal bonds or municipal bond mutual funds.

High-quality five- to 10-year munis are now yielding around 6 percent. That's the equivalent of a taxable investment earning 8.3 percent in the 28 percent bracket, 8.7 percent in the 31 percent bracket, and even more if the bonds also free you from high state and local taxes.

Here are two ways of using municipal bond mutual funds to try to capture a capital gain:

* Buy now, on the expectation that buying pressure from investors will push muni prices up. There has already been a weeklong rally in the muni market, but it probably isn't over yet.

* Buy high-yield (higher-risk) muni funds. Even a modest economic pickup will strengthen the revenues behind these bonds and raise their price, says Ian McKinnon, head of fixed-income investing for the Vanguard funds.

Why use mutual funds rather than individual bonds? Because fund shares are easy to sell if you want to take your profits; individual bonds aren't.

* Stocks. Stock brokers are hitting the phones to sell "Clinton portfolios" -- companies involved in bridge and highway design and construction, biotechnology, waste management, clean-air compliance, HMOs, worker training and high technology. But at the moment, it's all just hype. Clinton has so much on his plate that it's hard to know how soon and where the dollars will flow, let alone how many dollars there will be.

More to the point is the market's current value and shape. Nearly one-third of all stocks selling above $3 are priced below their 1987 crash lows, says Robert Farrell, chief market analyst for the brokerage firm Merrill Lynch; more than half of the stocks are down more than 20 percent from their 1992 highs -- a hidden bear market that has hurt a lot of mutual funds. This suggests that we're coming to the end of the 1991-1992 bull market. Farrell expects a tough year in 1993.

* Interest rates: Pessimists worry that fear-of-Bill will raise interest rates -- and indeed, long-term rates have been rising a bit. But if the economy stays as soft as expected next year, this isn't a threat. The general outlook for the 1990s: low interest rates, low inflation and slow growth.

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