2009Aug7 Tax and Consequences

 

Do you believe the total amount that you pay in taxes will be lower when you retire?

Planning for retirement must include an assumption about income taxes. Three quarters of respondents are assuming that their income tax burden will increase after they retire. Since most retirees experience reduced gross income at retirement, the implication must be that tax rates are expected to increase.

 

In our discussions with people, we are amazed at how many are unaware of the expiration of our current income tax rates and the return to the higher rates that were in affect at the beginning of this decade. The Democrats will get an increase in tax rates without having to vote for one simply due to the current law expiring or “sun-setting.” They may still have to vote for even more taxes to pay for the proposed “benefit” increases that they are trying to push through Congress.

 

Has your outlook on future tax changes caused you to alter your retirement plans?

Eighty five percent of the respondents indicated a change in plans due to anticipated taxation. There are a number of options available for retirement income planning to reduce or minimize taxation. These vary based on income needs, life expectancy assumptions and the type of assets you are willing to own. A regularly updated retirement plan is essential to adjust to changing economics and tax law.

 

Do you want the government to increase the services that it provides and pay for them through higher taxes?

Respondents are clearly lopsided on this issue with 90% opposed to the government increasing services and taxes. The consensus against higher taxes and a smaller government is how President Reagan created a coalition with Democrats to pass tax reform in 1981.

 

This is absolutely inconsistent with the messages coming from the Obama administration regarding healthcare reform, refunding the Cash for Clunkers and the efforts to implement Cap and Trade legislation. The August Congressional recess should bring more reports of Tea Parties showing opposition to these proposals when Congressmen hold constituent meetings. Preliminary reports of public push-back are encouraging. There may be enough time to influence the legislative decisions of those up for re-election next year.

 

If you knew tax rates were going to be increasing would you alter your investment plans?

It is no surprise that 90% of the respondents answered in the affirmative. This is always a baffling issue when examining the planning process of Congress. Congress always projects revenue on a static basis by assuming that individuals will make the same decision at a 70% tax rate as they will at a 28% tax rate. Revenue models must be dynamic because people will adjust economic behavior based on the perceived penalty for a given decision. Increasing tax rates reduces real revenue to the government.

 

Even an examination of the tax returns of most Congressmen will find evidence of tax planning to reduce their own tax liability. Their constituents are no different in their desire to retain as much of their income as possible for their own benefit. Yet, in the midst of the most significant recession since the Great Depression, increasing taxes remains an essential part of the Administration’s current policies. The increased government debt this year must be repaid – primarily to the Chinese.

 

There is no serious attempt to reduce government expenses as a means of providing cash for debt service. The only alternative is an increase in taxes. Will this alienate the electorate from the Administration? Only time will tell.

 

Does the amount of your total current tax payment materially affect your standard of living?

On the surface it would seem that everyone would agree that any diversion of one’s income would result in a decrease in one’s standard of living. However, twenty percent of respondents do not believe that income tax levies affect their lifestyle choices.

 

Perhaps those respondents are altruistic realizing some tax level is unavoidable to maintain our common defense and some essential, national interests. Perhaps they are among those whose income tax withholding is sufficient to cover their liability and do not realize that a “tax refund” does not mean they did not pay taxes.

 

Perhaps there is still a minority of people who are unaware that the tax reductions in the 20s, 60s and 80s all resulted in more growth, rising incomes and more job creation. The lower rates encouraged higher income earners to pursue more productive activities and place less emphasis on sheltering income and assets. The entire economy benefited and tax revenues to state and federal government increased. Lower rates encourage individuals to work harder, save and invest more and take more risks.

 

The tax rate increases of 1990 and 1993 had the opposite impact. Those changes made it more difficult for citizens to climb the American economic ladder of success.

 

Would you favor a tax levied on consumption over one levied on income?

Respondents are equally split on the desirability of income over consumption taxes. The attractiveness of consumption taxes is the revenue generation from the higher levels of spending by the “wealthy.” The “wealthy” often structure their income to minimize exposure to income taxes through using deferrals or exempt income options.

 

One of the great fears is the promise of replacing income taxes with a consumption tax will be forgotten by a later legislature. We already have sales taxes on most consumption. Increasing it to levels that would support government activities is not likely to receive public support without an offset in the income tax code or its elimination. However, the IRS will not go away. It will just be dealing with individuals and entities in the chain of production to ultimate sale.

 

Other than a direct point of sales tax, the consumption tax is generally a hidden tax that is more difficult for the public to see and monitor. Legislators are more likely to raise the consumption tax when the consumer does not see the direct impact on purchases or an annual income tax accounting as we currently endure.