Tuesday, April 1, 2008

Big Tax Hike On The Horizon


How High Will Taxes Go After the Election?

It's often said politicians will promise just about anything to get elected. And you don't have to be a political analyst to know these promises are made to be broken.
And so it is with the leading presidential contenders when it comes to tax policies.
On the Democratic side, both Barack Obama and Hillary Clinton propose significant changes to the U.S. Tax Code. Barack's plan is to further shift the tax burden toward the rich from low- and middle-income workers. It's not enough that the wealthiest 1% of Americans already pay more than 35% of all federal income taxes.
Hillary's plan emphasizes using tax policy for social engineering purposes. She wants to change the tax system to change the way Americans use energy, save money and care for elders.
Both Barack and Hillary want to end the 2001 Bush tax cuts, at least for upper-income Americans. Hillary sets that threshold at US$250,000 or higher annual earnings. Barack is less specific, but his plan roughly corresponds to Hillary's. The biggest difference is that Barack's threshold for "upper-income" starts at US$75,000 in annual earnings.
Both Democratic candidates also want to greatly increase spending on their pet social programs. Hillary, for instance, says: "My healthcare program will cover everyone. I don't leave anybody out. It is a universal system."
That won't be cheap.
The Other Side of the Ticket: Keepin' Bush's Policies Alive
On the Republican side, the nomination of John McCain seems all but certain. John says he wants to make the Bush tax cuts permanent (although he originally voted against them).
He also advocates cutting corporate taxes and getting rid of the alternative minimum tax. Finally, John promises to "restrain spending" and eliminate the "pork barrel."
From my own perspective, any tax cut is good. But none of the candidates talk seriously about cutting spending as well. Even John, with his talk of eliminating the "pork barrel," voted against an across-the-board tax cut in 1999. Plus, he said he's prepared to keep U.S. troops in Iraq - or anywhere else U.S. interests dictate - for 100 years. At US$125 billion annually just for the war in Iraq, and rising, that won't be cheap either.
When U.S. Treasury Obligations are "Junk"
I hate to be the bearer of bad news, but no matter who takes over the White House in November, taxes are going up, up, up. Out-of-control entitlement programs, pork barrel spending, and open-ended wars in Iraq and Afghanistan make that a foregone conclusion.
The total unfunded debt obligations for the federal government alone, including the present value of future Medicare and Social Security payments, is now nearly US$60 trillion. That's more than five times America's total Gross Domestic Product (GDP).
A ratio of 5-1 of unfunded debt obligations to GDP is more typical of a third-world country than a supposedly credit-worthy nation such as the United States.
That fact hasn't gone unnoticed. The Moody's credit rating agency warns that America's triple-A credit rating - first granted in 1917 - is in jeopardy unless the country can successfully deal with this avalanche of unfunded mandates. Without making some hard choices, America's sovereign debt may, in a decade or two, achieve "junk" status.
Is it Even Possible to Pay Back these Debts?
Of course, it's possible Congress and the next president could cut spending in 2009 - but still it won't be enough. To make a significant dent in these unfunded obligations, it won't be enough to pull all of our troops out of Iraq and Afghanistan and end federal bailouts of ailing banks and brokerages.
Congress must also radically cut back on future spending promises for Social Security and (especially) Medicare. It must also drastically cut military spending. And you can forget about any new spending, such as a national healthcare program.
Think Congress or the next president, for that matter, will do that? Not likely. There's simply no political will to cut spending, in the mainstream of either major political party.
But what Congress can - and I think will - do shortly after the election is to significantly boost taxes, especially on upper-income Americans. After all, "soaking the rich" is a time-honored American political tradition.
How to Beat the Coming "Soak the Rich" Policies
If you're "rich" (which under Barack's definition means you make over US$75,000 annually), what plans should you make to deal with what I think are inevitably higher taxes? Among other strategies, I recommend:
~Selling highly appreciated investments now, and paying the 15% capital gains tax. I believe capital gains taxes will rise sharply after the election.
~Avoid taking tax losses in 2008. Any tax loss will be worth more as marginal tax rates rise.
~Invest funds you don't require for your immediate needs in tax-sheltered forms - retirement accounts, for instance. The value of tax deferral will increase as tax rates rise.

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