The Coming Tax Storm

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There is a massive disconnect between what people think the future of tax rates will look like and what they are doing to prepare for it. If you believe that tax rates will be 1% higher than they are today, you should have as much money as you can in tax-free vehicles like a Roth IRA. The national debt is currently around $21 trillion dollars. A lot of people think that is not necessarily a big deal since that is only 106% of GDP but that is only a piece of the overall picture. If we were to run our accounting like every other country in the world, we would actually have $200 trillion dollars in debt due to all the unfunded liabilities. We’ve made a huge number of promises that we can’t afford to keep.

The reason the media hasn’t made a big deal about the debt is the cost of servicing the debt has been close to zero for the last 15 years. When interest rates start to creep up, the cost of renting the money could double or triple. The cost of servicing the debt would start to crowd out a lot of really important things in the national budget. The problem is not pork barrel spending, it’s the obligations that we can’t get out of by law. “This is crisis time.” -George Schultz The real problem with our budget is Medicare, as Baby Boomers leave the workforce the cost of Medicare is going to crowd out everything else out of the budget.

There is not a lot of upsides for politicians to try to change the existing law so as to modify what we are paying for Social Security or Medicare. People don’t want to make tough decisions when it comes to either raising taxes or cutting spending. If we get to the point where we have a sovereign debt crisis, we risk financial insolvency. A lot of economists believe we won’t get to that point until we see trillion dollar deficits, which we could see by the end of 2018. You can buy a trillion dollar bill from Zimbabwe and it only costs you $4, and that includes shipping and handling. Money is valuable because it is scarce, the more you print, the less valuable it becomes.

As inflation goes up, the cost of basic services will go up as well. Reducing spending is known as the third rail of politics. If anyone brings it up, they will probably find themselves voted out of office. Every year that goes by where they fail to reduce spending, the fix will be more draconian and severe. The likelihood that taxes will go up is increasing every single year. You don’t have to go very far back in history to find tax rates that were dramatically higher than they are today. Tax rates ebb and flow over time based on the needs of the government. There isn’t any reason to expect that tax rates won’t be higher in the future than they are today. When you take your money out at retirement, do you believe taxes will be higher or lower? If you believe it’s going to be higher, then you should put as much money as you can in tax-free vehicles.

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