GRD Season 4 Episode 1_Will Tax Rates Ever REALLY Increase_mixdown
===

[00:00:00] Hi, I'm Ed Slott. And I'm Jeff Levine. And we're two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you the saver, so that you can make better decisions because better decisions on the whole lead to better outcomes. And here's how we're going to do that. Each week, Jeff and I will debate the pros and the cons of a particular retirement strategy or topic with the goal of helping you keep more of your hard-earned money.

At the end of each debate, there's going to be one clear winner you. A more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation to decide what's best for you and your family. So here we go. Welcome to the Great Retirement Debate. Alright, welcome back to the latest episode of the Great Retirement Debate.

Ed, good to see you again, my friend. Great to be back here with you. It's, uh, it's fun. We've got, uh, another topic. Today we're going to discuss Ed a topic I know that you are passionate about, you've been talking about [00:01:00] for, I don't know, for as long as I can remember you, which at this point is getting to be a pretty long time.

Yeah, it's a, well, even before you, I would say 40 years, uh, it may turn out I'm wrong for 40 years. Uh, so the question is, is for 40 years I've been warning people about the debt and the deficits, and look at the numbers where the whole country's running on a credit card. What's the result? Tax rates have got to go up, but they, all right.

So for, so for today's topic is will tax rates ever go up? I don't know. Hey, well you've been, like you said, you've been talking about this for 40 years, so Wow. You get first crack. Let's hear it. Are tax rates ever going to go up? I'm starting to believe, maybe not, you know, as a CPA, I'm trained to believe in math.

And you know, if you look at the math, I mean, as of this recording, and it could be, you know, another trillion or two tomorrow or the next day, I don't even know what it is, 38, 39 trillion of debt. All I know is [00:02:00] if they have to round up to the nearest trillion, that's a problem. The whole country is running on a credit card, so I believe, I mean where is the revenue going to come from? Imagine running a business like this, the whole country is running on a credit card. So yes, I believe tax rates at some point when sanity returns or math returns will have to go up, but it hasn't happened. So this begs the question, will tax rates ever go up in our lifetime?

And so far it, you know, you just hit on a really good point, Ed. When we talk about will tax rates ever go up, like ultimately if in a hundred years they go up, because at that point, you know, they're like, uh, who cares? Right? Like, I mean, don't get me wrong. I, I worry about my grandkids and my great grandkids and my great-great grandkids, but my great great, great, great, great.

Like, they'll deal with it at that point. Like, it, it's really not, will it go up at some point? It's really the question of will it go up at a point where it affects me, right? Like, that's really the question that, and I don't, I don't. I don't [00:03:00] know about that. You know, it depends who's in office and like I said, and it's tough.

It's very tough. No matter who's in office, which party is in to raise taxes substantially. Look at the big debate. Debate whether it should be 37 or 39.6. Mm-hmm. You're talking about two or 3% or something, and it's driving people crazy. So I don't see any big increases. Other than the thing that worries people the most, the stealth taxes, trimming around the edges, that's where they may be able to get you.

So, Ed, why don't you, why don't you explain to us what stealth taxes are and maybe give us a couple of examples that, uh, that people might be aware of. Well, other increases, not always taxes. For example, the Medicare surcharges, that's not a tax and it's hard to plan for, but as income goes up, you pay more in Medicare premiums every month.

That could be thousands of dollars a year. Or net investment income tax, the [00:04:00] 3.8% tax on net investment income tied to adjusted gross income or your income in general, the deductibility of medical expenses, all these items. So people always ask me in seminars, 'cause I'm a big fan as you know, of the Roth IRA.

Well won't they eventually tax Ross And I don't believe so. 'cause it brings in too much revenue. But they could trim around the edges. People might say, well, maybe they'll start required distributions, or they'll do other things. If you have a Roth or a a certain amount in your Roth, other things will be more taxable.

So that's more likely to happen than a big jump in tax rates because I believe that would be a too much of a shock to the system. Yeah. You know, and I think if we think about history ed, a lot of times when people talk about the tax rates, what they really are looking at is that top line number, right?

That you know that what is the top federal income tax rate. And, and a lot of times, people, and in fairness, you and I have done [00:05:00] this too like, they quote like, wow, it was over 90% for a long, you know, I had to, in every seminar it was like one guy, right? Like one guy had enough money to pay and, and at that point it was really like one guy, right?

Like, it was, it was not the income distribution that we have today, a little bit more income equality that we're still a long way from being truly, you know, two being truly equal between the sexes. But it was like one dude back in the day who paid a whole bunch of. Uh, you know, tax at the top rate today, there are a lot of people, now, certainly it's a vast minority of the country, but in terms of gross numbers, it's a lot of people who pay tax at the 37% bracket.

And so if you actually look at the average, average rate. Right now. I didn't, you didn't hear me on repeat. There's not a, you know, there's, there's not a audio issue there. The average, average that people have paid over time, that actually has been remarkably level now, certainly we have dropped a little bit here, especially after the tax cut and jobs act of [00:06:00] 2017 that did dip it.

But it's not like this crazy chart where you see these giant peaks and giant valleys. It's a much more. Level number of the average rate that the average person has paid over time. So it's something to think about. And you know, ed, I think you started to allude to it, but maybe it's worth touching on here.

Like, at the end of the day, like there's a lot of people who go to work, they, they get their check taxes come out at the end of the year, they go to their accountant and the accountant says, here's how much you owe, or here's how much you get back. And that's kind of it. But you know, we're, this is the great retirement debate, right?

We're, we're a show about retirement planning. So who, like, why does it even matter when we're thinking about what does the future tax rate look like when it comes to retirement planning? What are, what are some of the, the impacts that it would, that somebody thinking about retirement or in retirement might.

Well at higher taxes in retirement, it's a scary thing for most people. They go on a fixed income, not per se, but social security pensions taking [00:07:00] RMDs. Sure. And or their monthly money is eaten up by higher taxes that could really impact their lifestyle, so their right to be worried about. What would be my tax rate, my effective or average tax rate, as you say in retirement?

How much of my retirement money will I get to keep and spend on the things I need to spend it on during retirement? Should I be worried? Yeah. And there are a lot of, there are a lot of factors that go into that, right? It's not only like what is your total income, but like what's the makeup of your income?

So, you know, we've talked a little bit about social security already in, in previous episodes. Social Security sort of has a built in tax efficiency to it. A dollar of Social security is generally a little bit more tax efficient than a dollar of, let's say IRA income. Because even in a worst case scenario, which we all like to complain about, but even in a worst case scenario.

It still means 15 cents of every dollar of Social security income you get is tax free, because at most the federal government taxes 85 cents of the dollar. So [00:08:00] there's some tax efficiency there. There's also the idea of the Roth IRA. You talked about conversions, and I almost think about Roth conversions.

The process is like a magic wand to create income at a time when you would want income, and you might say, well, why would you ever want income? Doesn't that mean you're gonna pay higher tax? Well, the, the fact of the matter is. With a retirement account at some point. Somebody will pay the tax. It's either you at some point during your lifetime, either while you're working and putting that money away, or later on when you do a Roth conversion, or maybe later on in retirement when you take out the money or if you leave it in the traditional account long enough, it's going to be your beneficiaries, your children, your grandchildren are surviving spouse, but somebody at some point is going to pay the tax.

And so if you know that the tax has to be paid at some point, then. It's better to do that when your tax rate is relatively low. So when we think about the context of, will tax rates be higher in [00:09:00] the future, you know, it's really when we're looking at individual planning, it's as you said, will my tax rate be higher in the future?

Which is a combination of both. What does my income look like, but also what does the law look like? My income could drop, but if the, you know, if Congress all of a sudden said, boy, we really don't want, you know, $40 trillion in debt and we're gonna raise money in order to pay that down. Well, your income could theoretically be in the future, but if Congress RA raised those rates high enough, you might be better off paying tax today.

When your income is higher at a theoretically low rate. But as you said, you know, there's been a lot of people, Ed, you're not alone. A lot of people have predicted that tax rates are going to have to rise over time. Yeah. But I've been predicting it for 40 years and, and, and in the last 40 years it's basically gone the other way.

Right? Yeah. Yeah. I still think, I think, if I'm not mistaken, I have heard you say, uh. [00:10:00] If there was an investment in ITR Right, that you would buy everything income tax rate, right. Right. It r would be income tax rate. You would buy everything you could. 'cause you think it would only go up? Well, I mean, you know, it hasn't worked out that way over.

That wasn't my theory. That was based on Henny Young Men's Theory. He said, I'm putting all my money in taxes. The only thing sure. To go up. So I, so even Henny Youngman is wrong in this case, at least for the last 40 years. You know, and, and people say, how long can this go on? And I, I think it's worth pointing out that, you know, there is, even from a mathematics perspective, there, there are some.

Really legitimate arguments to say why tax rates could remain low. Again, not a prediction that they will, but why they could. Right. And, and, and some of the reasons behind that would be, you know, one is there are, uh, there, there's some people who believe that if you lower the overall tax rates enough, and if you create the right economic [00:11:00] incentives and you've got regulations in the right.

Uh, shape and everything else is good that you can create massive growth. And if you create massive growth right there, there's a couple ways to raise taxes. One is to raise rates, right? One is to have more people with more income. So even if you're at the same or lower rates, your revenues rise. And so there, there are, you know, a lot of people who believe that by creating the right economic conditions, tax policy, regulatory policy, uh, et cetera, that at some point we will be able to grow in to, uh, you know, grow into this and create enough income to begin to pay down our debt or reduce the, uh, the deficit.

And we did, in fairness, um, have a lot of this after several wars where there were. Huge run ups after World War ii, and we did take our, uh, you know, our, um, GDP numbers, the, the percentage of debt to GDP. We, we knocked that way, way down from where it was. Now we've gone back up to [00:12:00] basically historically high levels, but it's possible it could happen again.

There's also others who believe in, um, a theory that's called MMT. Which is short for modern monetary theory and effectively, and I, I'm not gonna do the theory justice now in the time that we have, but effectively the idea here is like, you shouldn't think of the government like you do an individual, right?

Like we, you, you mentioned like, uh, we're, we're on a credit card. Well, as an individual, you are, you have to pay your credit card and you don't just get to like, kind of make up money, but the federal government, in a sense, can print money at will, right? Like it's kind of just, and it's not even really printing money anymore.

It's like a, a digital zero. Just add another zero to a column, right? In a book. And so the federal government can effectively always pay off its debt by just printing more money. Problem with that, of course, is as you put more money into a financial system, you potentially create significant amounts of inflation.

And we saw that in recent history. So [00:13:00] MMT Modern Monetary Theory is really just a thought process that says the federal government doesn't need to run this balanced budget in the same way a household could. And it's okay if we continue to run these deficits over time. And really what federal lawmakers should keep an eye on when they're doing this policy is not balancing the budget or the debt.

It's really more focused on inflation. And is the federal government policy or the federal government's policy is creating too much inflation. But that is another way. That in theory, we could continue to run these deficits and have this debt without ever quote unquote course correcting. And of course, the third one there being what we alluded to at the start, which is maybe at some point it does become, uh, unruly and it does get fixed.

But if it's beyond effectively your planning life, uh, not that you don't care about what the future holds for your family, your kids. But at the end of the day, for planning purposes, it doesn't matter, right? Like for you, it wouldn't [00:14:00] matter if it happens beyond your planning horizon, but those are three ways in which the tax rates really could stay this low or potentially even lower going forward.

Relatively speaking, but I would still lock in these low rates. Uh, for example, with simple things like Roth IRAs. We are saying if this, then that this could happen, that could happen. These are all hypotheticals and people want certainty going into, into retirement. One thing if. Even if you're not sure if rates are going to go up or not, with the Roth IRA or moving to any tax-free vehicle, you lock in today's tax rates and you never have to worry about that.

Hopefully, if they don't change the rules around the Roth, which I don't think they will, because it brings in too much revenue, so you could still lock in today's low tax rates and sale through retirement with more of your money in tax-free vehicles. So you know, you can spend all of that without worrying about higher taxes.

What you're really saying is there, [00:15:00] there's a peace of mind element, right, right. That comes along with that. Yeah. I, I think that's fair too, right? It's not all about just dollars and cents, I mean, right. I, I always think about the Roth IRA or Roth accounts as basically a tax insurance account. Right like, and you're right in the same way, you know, Ed, you're, you're in your office.

I'm in my home office today. I, you know, I have homeowner's insurance. I don't hope that I'm profitable on my homeowner's insurance, right? I mean, something very bad has happened. So, but I pay it. You know why? Because it gives me the peace of mind of knowing that if something happens, I'm okay. Right. The Roth IRA can be viewed in a very, very similar way.

So, Ed, before we wrap up this episode of, uh, the great Retirement Debate. Lemme put you on the spot. You know, for 40 years you've been saying the tax rates are gonna go down. No, go up. You say, I'm sorry, 40. Well, I was trying to give you the benefit of the doubt. Yeah. See, see, I was trying to give you one there.

Yeah, you're right. For 40 years you've been saying the tax rates are likely to go up. Let's call this year [00:16:00] 41, Ed. You know, open up, uh, your box, look inside the crystal ball, you put away in there and tell me. What do you think the future holds? And then maybe in five years or so somebody on the internet will bring this back and, and they'll tell us whether either of us were right or wrong at that point.

Where do you think we go? I think you have to go, based on what you said, not our future, but it could be a hundred years from now. At some point the bills are going to have to be paid, but it might not happen in our lifetime. 'cause as I said before, raising rates is not good for any political party if they go up too much.

That's, that's people, what people feel. So it may stay level for a while, but why take a chance? Again, like you said, the peace of mind. Something like a Roth IRA. You can lock that in. I still think that's a good bet at some point, maybe not in our lifetime, but our kids or something, uh, rates will, I believe, have to go up as we started.

If you believe in math or they find us some other way to balance the budget, or maybe it's never gonna be balanced, I don't know, but you can lock in and you can [00:17:00] have certainty that your rates in retirement can be zero if you have it in tax free vehicles. Yeah. Yeah. I, I think I still, I think I still agree with you, you know, from my own planning perspective, I still believe that when I reach retirement rates will be higher, uh, than they are today.

I think that's the more likely path. And you know, to your point, if, you know, I have some of my money in Roth, not all of it, but some of it for retirement in a Roth, for me personally, I look and I say. If I'm wrong and I overpaid today, I don't really care. I have that money tax free for the future, and I feel comfortable about it too.

So at the end of the day, rates may go up, rates may go down. You've gotta plan based on what's realistic within your planning timeframe. For the foreseeable future, it looks like rates are gonna be where they are now or pretty? I think so. Darn close. 'cause as you said, tough to raise them. Ed, this was fun.

Okay. We had a, this was a good, lively discussion. Uh, always learn something from you. Uh, you know, and, and certainly it's been. [00:18:00] It, it's been interesting to hear your perspective of going back, um, even further, having a little bit more historical background than, uh, than I do, at least, you know, from a practice perspective in my, I really, what I'm saying is that you're older Ed.

That's really what I'm getting at. Well, I was talking about the generations and I had this very conversation with Abraham Lincoln and he said the same thing. Taxes have a war, taxes have to go up. But didn't happen. Well, it happened for a little while. That's it. After the war. Yeah. Yeah. Alright, well everyone, thanks for joining us for this episode of The Great Retirement Debate.

We hope you picked up something. Remember, you know, ed and I are here to point out both sides of the issue because at the end of the day, there really is very rarely a right or a wrong for everyone. The winner of each of these debates is meant to be you, the consumer who has more information and can make a better decision for your future.

So thanks so much for joining us everyone, and we'll see you next time on the Great Retirement Debate. Alright, thank you.

Jeffrey Levine is Chief Planning Officer at Focus Partners. This podcast is for informational and educational purposes only, [00:19:00] and should not be construed as specific investment accounting, legal or tax advice.

Certain information mentioned may be based on third party information, which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The topic discussed and corresponding arguments are those of the speakers and may not accurately reflect those of focus partners.