Why Taxes Will Go Up!

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      I have often said that tax strategy is the master wealth skill, the one that can make the difference between “just” doing really well, and getting really rich. It is somewhat ironic that it tends to be the least appreciated wealth skill, where consumers – even really rich, smart, and sophisticated ones who should really know better – downplay the value of this expertise, and treat the chore of getting taxes done more like dry-cleaning than the incredibly complicated master-art it really is when practiced well. Far too many taxpayers just want to drop their taxes off and get them “done” cheap. They often complain about how much they pay, but won’t take the trouble to seek out true masters, and are very resistant to paying for quality advice. This advice is usually not cheap, but is often one of the very best investments a taxpayer can make, with tax savings typically many, many times the cost of the fees, compared to the results from the cheap (sometimes not so cheap) mediocre tax “pros” they often use.

     More than in any other profession I’ve encountered (except maybe my own, financial advisors!)  – law, medicine, engineering, whatever – I have found that true experts are as rare as hens’ teeth, to be so outnumbered by the legions of barely-competent, “you gotta pay your tax” software-junkie button pushers as to be nigh impossible to find. Like financial advisors, it is very difficult for even very smart consumers to tell the difference between truly excellent tax practitioners, and those who merely smile winningly and look good in a suit. This sad state, coupled with the dry-cleaning mentality of most consumers, means that vast sums of family wealth are typically lost to legitimately avoidable taxation. I mean millions on untold millions!

     I have trotted this soapbox out, of course, for a reason. While we have enjoyed some modest tax reduction of late, I am utterly convinced this is a brief holiday only, and that taxes will rise with a vengeance for the rest of your lives, and those of your children’s, too. If you don’t watch out, they will choke your family’s wealth. Why is this? There are 3 primary forces, big as hydrogen bombs:

  1. US Federal deficits are out of control and will be   exacerbated by factors 2 & 3 below. If you look at the graph, you will see that for most years since 1970 the US has spent more than it has taken in as a percentage of economic output (GDP). The difference is additional debt, and interest on the debt, which itself adds to the debt. To pay off maturing government bonds, more bonds are sold, effectively putting one credit card’s balance on another. 
  2. The cost of US entitlement programs, primarily Medicare and Social Security, are exploding and widely predicted to blow up/run out of money/go bankrupt in just a few years. Economic seers have been warning of this at least as far back as the 70’s, but real change (besides taxing benefits and other sneaky tax increases) is politically impossible and will almost certainly not happen under our current system of governance.
  3. The death-spiral economics of factor 2 are being super charged by two supreme demographic change trends: a)   retirees are living FAR, FAR longer then ever modeled when these programs were set up, and pulling ever larger chunks out in benefits for decades, instead of the months initially assumed back in the 30’s when Social Security was born (and 80-years olds were pretty hard to find); b) the baby boom (now playing golf and spending big on health care until very late in life) had lots fewer children to replenish the workforce and pay FICA taxes into the pay-as-you-go entitlement system. Many of the jobs the “lost” children would have filled are worked by illegals – millions and millions of illegals – who tend not to pay taxes.

Look at the big picture, and this triple-whammy picture coming into focus will result in tax hikes like we have never seen, to pay for it all when we hit the breaking point. And that’s before factoring in the impact of if the new Socialist fashion takes real root in the US. The only other alternative is monetizing the debt, a nice way of saying printing tons of money to drive down the value of the dollar and pay it off cheap by stiffing the lenders. This is the banana republic solution, and not a good one. It is the path Weimar Germany took after WWI, which devastated  the economy and paved the way to Hitler’s election. Remember those wheelbarrows of worthless marks from grade school? The currency lost so much value it was weighed instead of counted to make purchases.

No, I think tax hikes are inevitable. In these times, prudent tax planning can move the needle as perhaps never before. Let those with ears, hear, and hold onto their wallets!

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