For months, economists and industry professionals have been predicting that taxes will rise. Among all the different options our government is considering to decrease the deficit, the most likely is an increase in tax revenue. Until just recently, however, Americans have been “left in the dark,” waiting for the Obama administration to shed some light on the subject.
In March 2010, Mark Thoma of “CBS Money Watch” said, “It won’t be possible to solve the budget problems in spending alone; at some point, government at all levels will need to find additional sources of revenue. Thus, taxes will increase.” He goes on to say that the recession and the economy will need to be on “firmer footing” before we can expect anything to happen. Through income taxes, capital gains and dividend taxes, as well as payroll taxes, the government would be able to increase their taxable revenue to aid the spending cuts they would put in place.
On Wednesday, November 10, 2010, a preliminary proposal delivered by President Obama’s fiscal commission was laid out with the goal of decreasing the current deficit our country is experiencing. The proposal would achieve approximately $4 trillion in deficit cuts over the next decade. The $4 trillion would come from government spending cuts (which would include cuts in defense) as well as added tax revenue.
When closely examining the proposal, three items stand out prominently--cuts to Medicare, cuts to Social Security, and increases in taxable revenue. As for Social Security, the plan proposes a “gradual raise” in the national retirement age from 65 to 69 by the year 2075. Cuts to benefits coupled with increased tax revenue on the wealthier population’s income would also be implemented. Medicare spending cuts are also a factor because the plan proposes to slow the growth of the program.
Most importantly, taxable revenue will increase in various ways under the new proposal. According to John McKinnon of The Wall Street Journal, “The preliminary plan in its current form would end or cap a wide range of breaks relied on by the middle class, including the deduction for home-mortgage interest. It would tax capital gains and dividends at the higher rates now levied on wage income.”
Although this preliminary plan is intended as a starting point for deficit reform, many believe that any provisions or alterations to its current model would make the situation worse. The final version of the plan is due on December 1 of this year. David Walker, the former comptroller general of the United States and an advocate for debt reduction said, “In the end, the president is going to have to decide whether to incorporate some of this into the 2012 budget.”
Parties on both sides were mixed about the preliminary proposal. Richard Trumka, president of the AFL-CIO, said “Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare.” The conservative American for Tax Reform also expressed its distaste, saying “[The plan] confirms what everyone has known: This commission is merely an excuse to raise net taxes on the American people.”
What we do know is that we have expected taxes would go up before the end of the year. The government is now on the fast track for deciding whether or not to extend the Bush administration tax cuts or to raise the rates. With our deficit at an all-time high-- hovering around $13.7 trillion—Great Lakes Retirement Group believes taxes will increase one way or another.
Tax-deferral-based assets will become an important tool in the years to come as our nation battles the war against the national deficit. In all likelihood, this proposal is only the beginning. As the government pushes on, they will be forced to put reform in to place if they are truly committed to lowering the deficit, fixing Social Security insolvency, and getting back on track. Taxable revenue is the first stepping stone. President Obama was quoted as saying, “Tough choices will be necessary.”
You can still do something about your retirement assets to avoid becoming a victim of future tax increases to capital gains and dividends. Many economists believe that a massive amount of debt de-leveraging and deflation could send our economy into another tailspin. If you are worried about the proposed tax rate increases and the shape of the stock market, call Great Lakes Retirement today. Allow us to help you re-position your assets in the most tax-advantageous and effective way. Call toll-free, 866-417-4156, to set up a free, 15-minute phone appointment with me.
William “Bill” Smith
Bill Smith is a RFC and the president and founder of Great Lakes Retirement Group, a Registered Investment Advisory firm located in Sandusky, OH, and Sheffield Village, OH.
For further educational information or to attend one of Bill’s educational classes, please email ContactUs@GreatLakesRetirement.com with the subject line “Blog” to receive more information, or you may visit his website, www.GreatLakesRetirement.com .
Sahadi, Jeanne. “$4 Trillion in deficit cuts proposed.” CNNMoney.com (2010): Thursday, November 11, 2010
McKinnon, John; Boles, Corey; Vaughan. “Deficit Panel Pushes Cuts.” The Wall Street Journal (2010): Thursday, November 11, 2010
Thoma, Mark. “Be Prepared: Tax Increases Are Inevitable.” CBS Money Watch (2010): Thursday, November 11, 2010