It’s a truism to observe that politicians will promise just about anything to get elected. And you don’t have to be a genius to know that these promises are made to be broken.
And so it is with the leading presidential contenders when it comes to tax policy.
On the Democratic side, both Barack Obama and Hillary Clinton propose significant changes to the U.S. Tax Code. Barack’s plan is to further shift the tax burden toward the rich from low- and middle-income workers. It’s not enough that the wealthiest 1% of Americans already pay more than 35% of all federal income taxes.
Hillary’s plan emphasizes using tax policy for social engineering purposes. She wants to change the tax system to change the way Americans use energy, save money and care for elders.
Both Barack and Hillary want to end the 2001 Bush tax cuts, at least for upper-income Americans. Hillary sets that threshold at US$250,000 or higher annual earnings. Barack is less specific, but his plan roughly corresponds to Hillary’s. The biggest difference is that Barack’s threshold for "upper-income" starts at US$75,000 in annual earnings.
Both Democratic candidates also want to greatly increase spending on their pet social programs. Hillary, for instance, says: "My health care program will cover everyone. I don’t leave anybody out. It is a universal system."
That won’t be cheap.
On the Republican side, the nomination of John McCain seems all but certain. John says he wants to make the Bush tax cuts permanent (although he originally voted against them). He also advocates cutting corporate taxes and getting rid of the alternative minimum tax. Finally, John promises to "restrain spending" and eliminate the "pork barrel."
From my own perspective, any tax cut is good. But none of the candidates talk seriously about cutting spending as well. Even John, with his talk of eliminating the "pork barrel," voted against an across-the-board tax cut in 1999. Plus, he’s said he’s prepared to keep U.S. troops in Iraq—or anywhere else U.S. interests dictate—for 100 years. At US125 billion annually just for the war in Iraq, and rising, that won’t be cheap, either.
When U.S. Treasury Obligations are "Junk"
I hate to be the bearer of bad news, but no matter whether Hillary, Barack or John is elected in November, taxes are going up, up, up. Out-of-control entitlement programs, pork-barrel spending, and open-ended wars in Iraq and Afghanistan make that a foregone conclusion.
The total unfunded debt obligations for the federal government alone, including the present value of future Medicare and Social Security payments, is now nearly US$60 trillion. That’s more than five times America’s total Gross Domestic Product.
A ratio of 5-1 of unfunded debt obligations to GDP is more typical of third-world country than a supposedly creditworthy nation such as the United States. And that fact hasn’t gone unnoticed. No less an authority than the Moody’s credit rating agency warns that America’s triple-A credit rating—first granted in 1917—is in jeopardy unless the country can successfully deal with this avalanche of unfunded mandates. Without making some hard choices, America’s sovereign debt may in a decade or two achieve "junk" status.
Of course, it’s possible Congress and the next president will radically cut spending in 2009. To make a significant dent in these unfunded obligations, it won’t be enough to pull all of our troops out of Iraq and Afghanistan and end federal bailouts of ailing banks and brokerages. Congress must also radically cut back on future spending promises for Social Security and (especially) Medicare. It must also drastically cut military spending. And you can forget about any new spending, such as a national health care program.
Think Congress or the next president, for that matter, will do that? If you do, you’re living in a dream world. There’s simply no political will to cut spending, in the mainstream of either major political party.
But what Congress can—and I think will—do shortly after the election is to significantly boost taxes, especially on upper-income Americans. After all, "soaking the rich" is a time-honored American political tradition.
If you’re "rich" (which under Barack’s definition means you make over US$75,000 annually), what plans should you make to deal with what I think are inevitably higher taxes? Among other strategies, I recommend:
- Selling highly-appreciated investments now, and paying the 15% capital gains tax. I believe capital gains taxes will rise sharply after the election.
- Avoid taking tax losses in 2008. Any tax loss will be worth more as marginal tax rates rise.
- Invest funds you don’t require for your immediate needs in tax-sheltered forms—retirement accounts, for instance. The value of tax deferral will increase as tax rates rise.
I’ll be discussing these strategies, and many more, at The Sovereign Society’s upcoming conference in Panama. (Click here to learn more.) Hope to see you there!
Copyright © 2008 by Mark Nestmann
P.S. I’ll be speaking at the Casey Research Crisis & Opportunity Summit in Scottsdale, AZ March 25-27. It would be great to meet any Sovereign Society members who are attending this event.
