No one likes to pay taxes, but they are a reality.
Believe it or not, our current tax brackets are at historic lows. While it may not feel that way, if we take a long view of tax policy and rates, it is evident we are in a historically low tax environment. The important question is “How long can this last?”
We know the Federal debt is trending in the other direction as the chart below indicates. To solve our nation’s financial issues, it’s reasonable to conclude that taxes must go up in order to reverse the growth trend in our national debt.
Reasons Why Taxes Could Double
1. Historically Low Rates Today. During the last two years of World War II, the highest marginal tax rate was 94% on taxable income over $200,000. If your taxable income was $210,000, you would get to keep $600 on the additional $10,000 you made. Of course, that $600 most likely went to state income taxes, leaving you with $0!
Currently, the highest marginal tax rate is 37%, which was brought into law by the Tax Reduction and Jobs Act of 2017. Beginning in 2026, the highest marginal tax will automatically increase to 39.6% provided Congress does nothing to extend the lower rates.
Since the 1940s, the highest marginal rates have been between 94% and 35%. We are at the lower end of the range.
2. Tax Policy is Disconnected from our Country’s Financial Needs. During most of our 110-year tax history, tax policy corresponded to the financial needs of our country. During World War I & II, the Depression, the Korean War, and the Vietnam War, tax policy reflected the current spending of our country. Tax rates increased to pay for the spending on war efforts and the financial support during the Great Depression.
In the last 23 years, certain events prompted increased spending to pay for government initiatives:
- The Gulf Wars in Iraq and Afghanistan
- The Financial Crisis of 2007-2008, also known as the sub-prime mortgage crisis
- The Global Pandemic
These recent events cost the nation’s treasury enormous amounts of money, and yet over the last 23 years we’ve seen tax cuts, not tax increases. The national debt has ballooned from $5.6 trillion to $31.7 trillion over the 23-year period.
3. Congressional Budget Office Projections. The Congressional Budget Office, CBO, prepares detailed budget and debt projections. The report provides insight into the future of Federal spending deficits and growth of our national debt. The projected annual budget deficit for 2024 through 2033 is $20 trillion, pushing our national debt to over $50 trillion.1
We don’t have a plan in place to reduce spending to a point that will eliminate the need to raise revenue. We have $31.7 trillion dollars already spent that will need to be collected from taxpayers. Remember, a dollar spent by the Government is a right to collect taxes today or at some point in the future.
4. Unfunded Social Programs. We’ve made significant promises (more than $100 trillion) to our citizens through a variety of social programs that are currently unfunded:
- Social Security
- Income Security
- Civilian and Military Retirement Programs
How can we pay for these programs and reduce the Federal debt without raising taxes?
5. A Four-Letter Word: Math. The math just doesn’t add up and our deficit pending isn’t sustainable.
Do you want to pay taxes on the seed or the harvest?
If you have $1 million in a traditional IRA and you are planning to retire, how much is your IRA worth to you after taxes? You can’t answer the question with any level of certainty. What if you guess wrong? What if taxes double and your retirement account is worth $200,000 less to you?
If you have $1 million in a Roth IRA and you are planning to retire, how much is your Roth IRA worth to you after taxes? We know the answer: $1 million dollars, and no guesswork. There is a price to remove the uncertainty of higher tax rates in the future, which is paying taxes today at known rates.
With proper planning, we can reduce the impact of higher taxes on your retirement plan. The integration of tax and retirement planning is critically important to release the full potential of your financial assets, and it’s best to start as soon as possible. We are in a historically low tax environment; in other words, “taxes are on sale.” Our team of financial advisors, CPAs, and EAs are here to help you develop and implement a tax reduction plan.
1 Congressional Budget Office 10-Year Budget Projections-May 2023