During his Aug. 18, 1988, Republican National Convention acceptance speech, George H.W. Bush pledged before a cheering throng, “Read my lips, no new taxes!” Portraying his opponent Michael Dukakis as a “tax and spend liberal,” his infamous assurance may have helped him to win the election. However, under pressure from the Democratic-controlled Congress to pass a budget deal, Bush later caved, agreeing to raise taxes with spending cuts to come later. The spending cuts never materialized. Bill Clinton, depicting Bush as “dishonest,” won the presidency in 1992, rendering Bush a one-term president.
In the crowded 2020 Democratic race, Bernie Sanders admitted middle-class taxes are likely to rise under his Medicare For All Plan, but individual costs will go down, he says. Others are hedging their bets, proclaiming “the rich and corporations” will bear the tax burdens inherent in a cornucopia of new entitlements and Green New Deal.
Political noise aside, logic says taxes will rise, ultimately. We cannot be sure of the timing, extent, or how the burden will be spread across the taxpayer base, but in your long-range personal and business planning, you should plan on paying more. Rising taxes make tax planning more compelling.
The Wall Street Journal editorial board, 5/12/2109, noted that America’s annual federal deficit is increasing, but not due to Republican tax cuts. Faster economic growth has increased tax revenues, however, spending is outpacing revenue gains. Spending is the problem! As Yogi Berra said, “It’s like déjà vu all over again.”
Retired mutual fund manager Ralph Wanger explained the federal “deficit squeeze” succinctly in Morningstar magazine, Winter, 2019. Our GDP is $21.3 trillion. The federal government rakes in $3.4 trillion in taxes, and spends $4.4 trillion. Social Security, Medicare, defense and interest on the national debt comprise the lion’s share of spending. Our annual deficit is about $1 trillion, or 4.7 percent of GDP. Some say that’s manageable because the U.S. dollar is the world’s reserve currency and people want to possess American debt as a hedge in turbulent times.
Here’s the rub. Our total debt is the highest in history, $22.5 trillion, about 105 percent of GDP, growing by $1 trillion a year. Interest rates remain at historical lows, but for how long? Ten-year Treasury paper yields 1.760 percent as of 11/30/19; 30-year bonds, 2.170 percent. Notes Wanger, if the interest rate jumped to 5 percent “as it has many times in the past, interest payments on the debt would become the largest item in the budget.”
Along with rising state and local taxes, federal tax burdens on individuals and business are likely to increase in myriad forms. The Social Security wage base for 2020 will jump to $137,700, up from $132,900 in 2019, increasing the maximum annual tax paid by employees and employers to $8,537.40 each. (SAA Press Release, 10/10/19). Expect the taxable wage base to continue to creep up. Mayor Pete wants a Social Security surtax applied to all personal income above $250,000.
Countries with large welfare programs depend on a variety of taxes, including a value-added tax (VAT) or a goods and service tax (GST), a sales tax ultimately borne by consumers. Denmark, Norway and Sweden, touted as models for “democratic socialism,” have VAT rates of 25 percent. The EU average is 21.3 percent. That’s in addition to personal income taxes, payroll taxes, fuel taxes, etc. VAT rates generally move in one direction ─ up! Introduced in France in 1954, the French VAT rate has jumped from 13.6 percent to 20 percent. Some see a VAT in America’s future.
Climate change activists want to impose sizeable taxes on fossil fuels. Higher federal taxes on motor, aviation, and maritime fuels would raise transportation costs across the board. Farming costs would rise. Power plants use diesel, natural gas, and coal, and the cost of electricity would jump, an added burden for everyone, including lower- and middle-class consumers. Witness riots in France, Iran and Chile over rising fuel costs and bus fares. Expect local and state fuel taxes to increase. We have yet to start the conversation about paying for aging infrastructure, especially in densely populated urban areas. Per an American Road & Transportation Builders Association 2019 report, more than 47,000 U.S. bridges are in poor condition, in need of urgent repairs.
The pretense that we can increase benefits and subsidies and only “the rich and corporations” will pay is political bait and switch. In planning for 2020 and beyond, seek tax-wise strategies. Take advantage of all tax-incentives available to your specific situation. For any surplus capital, there are countless charities and humanitarian causes starved for funds.
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;firstname.lastname@example.org. Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.