Listen to almost every politician and you’ll likely hear a similar theme coming from their mouths – lower taxes. And why not? Telling taxpayers that you’re going to lower their tax bill is how you win elections.
But there’s a stark reality that America is facing right now. The low tax rates that Americans have enjoyed for the last decade or so are simply not sustainable. The current United States federal debt is over $12 trillion and is increasing by almost $4 billion a day. We’ve financed bailouts of the banking and auto industries. We’re funding unemployment benefits for an ever-growing number of citizens. We’re helping individuals who’ve had their homes foreclosed and are assisting other nations who’ve suffered unspeakable disasters like the citizens of Haiti.
All that money has to come from somewhere. It comes from taxpayers like you and me. The value of the dollar continues to drop and the deficit continues to rise. It shouldn’t be long before the government starts to do something about it.
That something will be raising taxes. And that might not be a bad thing.
Many Americans don’t really understand what a large federal deficit means to them. They’re pretty sure that the government won’t ever send them a bill for their portion of the deficit but outside of that it’s largely a mystery. The truth is that a ballooning debt will affect everything from the rates they pay for a loan to the value of their retirement accounts.
Let’s face it. A rising federal deficit causes all sorts of issues. First, a high federal deficit raises questions about the health of the U.S. economy. If the perception is that the country’s financial health is in doubt, foreign investors may start looking to other locales to invest their money. If foreign investors start dumping their U.S. dollar denominated assets that could send interest rates higher, lead to higher inflation and potentially usher in a bear market in equities.
Second is the simple concept that the more money that needs to be dedicated to addressing the federal deficit, the less money that is available to fund other projects like infrastructure, technology and education. This might not directly hit your pocketbook but it will be visible in the world around you.
The solution that the government is almost assuredly going to need to take to address this is raising income tax rates. It sounds like an unpalatable solution as higher tax rates take a direct chomp out of your paycheck but in the big picture it might not be as bad as it seems. Using that additional tax revenue to keep the federal deficit in check could not only help us avoid the issues listed above but actually help the exact opposite to occur – lower interest rates on loans and a positive stimulus for stocks.
If you are worried about tax rates going up, there are things you can do to prepare for it. Namely, pay down your tax obligations at today’s low rates. If you have traditional or rollover IRAs, for example, start converting those over to Roth IRAs and take the tax hit now. It might be painful now but you’ll be thankful you did in the long run.
The words “higher taxes” are something that almost no one likes to hear but understanding the full impact of them helps you to be prepared. Knowledge is power as the saying goes and in this case it could actually mean more money in your pocket.
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This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at
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