Time to Pay the Piper, Ep #33
We all make choices. But in the end, our choices make us. While a better life results from actions you have taken via better planning, outside factors need to be considered to implement better planning strategies. One of those forces is the reality of our national debt and its impact on our taxes. Mitigating these effects is the subject of this episode of the One for the Money podcast.
In this episode...
The Pied Piper of Hamelin [01:29]
The US national deficit [02:59]
Interest on the debt will only increase [05:31]
What can we do about the deficit? [07:46]
Prepare for potential increasing taxes [09:40]
Tax mitigation strategies [12:23]
The national deficit
The story of the Pied Piper of Hamelin takes place in the 13th century. The town of Hamelin had a rat infestation, and a man in colorful clothes offered to get rid of the rats for a fee. The town agreed, and the man played a pipe to get all the rats to drown themselves in a nearby river. When the Piper came to collect his payment, the townspeople told him they would not pay because they now had no reason to make good on their debt. As revenge, the Pied Piper played his pipe to get all the town’s children to follow him away.
This analogy is most appropriate given our national deficit. Like the people of Hamelin, America has run up a bill. But like the Pied Piper story, our children will likely ultimately pay the price. As I’m recording this episode, Congress is in a standoff debate about raising the debt ceiling. However, there’s no discussion about the debt itself.
What can we do?
Many people blame the deficit and spending on their opposite political party. But the truth is that despite the political divide in the country, we’ve had broad bipartisanship support for spending. We’ve had multiple administrations from both parties over the past several decades, and we’ve only had five instances where America spent less than it took in. Clearly, overspending is not a partisan issue but a bipartisan one.
So what can we do about the deficit? We have two choices as I see it. The first is considering voting for new candidates who will take the national debt seriously. That means more people would need to be active in the election primaries to get the candidates they want in November. The second choice would be deciding to be proactive in tax planning. Too many Americans don’t have a plan in which they implement strategies to reduce their lifetime tax liability. We’re fast approaching the 2022 tax season, which provides an excellent assessment of strategies you have utilized or need to consider.
Rising taxes
Congress and state governments have looked for ways to increase taxes significantly. Some factors they have considered are increasing the top ordinary income tax rate, raising the top long-term capital gains tax rate, and creating new minimum distribution requirements for taxpayers with high-income and mega-sized retirement accounts. While the federal government wasn’t successful in implementing these, several states are considering similar measures. According to the Washington Post, legislators in California, Connecticut, Hawaii, Illinois, Maryland, New York, and Washington state plan to release a series of bills this week that will target high-income and ultra-high-net-worth residents for tax increases.
While the specific proposed measures vary by state and include taxing unrealized capital gains, raising state income tax rates, and reducing the state tax exemption limits, certain proposals would also create a first of their kind of wealth tax. For those who think that high-income and ultra-high-net-worth individuals should be taxed the most, we need to remember that they always are, but also that they are the first subject of these taxes who will hire lawyers and accountants to avoid them. Also worth noting is that several European countries that initiated wealth tax have since abandoned it due to problems.
Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.
Resources & People Mentioned
Historical US Federal Individual Income Tax Rates & Brackets, 1862-2021
Billionaires in blue states face coordinated wealth-tax bills
The Ticking Tax Time Bomb in Your Retirement Account, Ep #12
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