Tax Increases On The Way – Prepare Yourself

Tax increases are on the way and you need to prepare yourself. No, this isn’t a political issue. It is a national debt problem, one we’ve been putting off for so long it isn’t funny. The bill is now due. 

The national debt is out of control. Okay, you’ve already heard that. You probably heard it the last month as Republicans and Democrats fought over $60 billion in tax cuts. Both claimed victory. Both are complete frauds and you should not buy the snake oil they are selling. The deficit for JUST THIS YEAR is $1.6 TRILLION. $60 billion in tax cuts is meaningless. It’s like fighting over who is going to pay for the coffee when you are going into an IRS audit that isn’t going to go well!

No, my dear reader. The national debt problem is much bigger than you know. The numbers are staggering, but we have a bigger problem. The cost of Medicare, Social Security and the military each year totals more than we take in via taxes. Just these three programs. This means if we eliminated every other government agency, we would still run an annual deficit. Now you can see the nature of the problem. It is a problem no politician has wanted to touch with a 10 foot pole. 

Well, we know longer have a choice. The investment community is waking up to the fact there is zero chance we can pay the $14 trillion plus we currently owe much less the more than $100 trillion we really owe when you figure in the unfunded liabilities of Social Security, Medicare and the Medicare prescription plan over the next thirty years. It’s scary stuff. 

The immediate problem is the rating companies have started threatening to downgrade our credit rating. We are currently “AAA”, which is great. The S&P, however, has downgraded our credit outlook to negative. This means there is a 33 percent chance our credit rating will drop in the next two years. That may seem decent odds, but the consequences of a drop are unthinkable. 

The first problem with a drop is interest rates would go up dramatically. Most loans in the country are tied to government or bond rates in one form or another. If they go up, so do loan rates. You think the housing market is a horror show now? How do you think it will look if rates go to 12 percent? I’ll wait why you take a shot directly from the vodka bottle. 

The second problem is our profile. Believe it or not, but a huge chunk of the institutional investors that buy our treasury notes are legally restricted to investing only in “AAA” bonds and notes. If we drop below that rating, not only will they not be able to buy more of our debt, they will have to sell what they are holding now. That would serious downgrade the value of our debt and the dollar along with it. Yes, “downgrade” as in you could wipe with it and get more value than spending it at the store. 

Politicians have reacted to the debt problem by doing what they do – kicking it down the road for someone else to deal with. Well, I have bad news for us all. We’re at the end of the road and it is a big brick wall…with spikes…and green goo…and monsters from some horrific video game. We must do something and we must do it now. 

The question is what? Well, our beloved Democrats and Republicans are going to have to start making some very ugly decisions. This is why you already see groups of them getting together to try to come up with something. Here’s the cold stone truth. The only way to begin to get out of this is to slash spending and raise taxes. There is no other answer. You can’t just do one or the other. It doesn’t make up the difference on the annual deficit or pay down the national debt. In short, leave your ideology at the door. It ain’t going to be welcomed here. 

What will this mean? Well, it means we need to stop being the world’s policemen. No more Libya “non-wars”. Let’s get out of Afghanistan…and why are we still there anyway? We’ll need to make the minimum age to get Social Security…72 or so. Maybe higher. Medicare will have to be dealt with. I have no idea how. NASA? Not so fast. National parks? Yeah, you are one your own, so don’t get hurt out on the trail. Schools? Ah…states, I have some bad news. You get the idea. Slashing government spending sounds like a great thing till you realize grandma is coming home to live with you…and you are 25. 

So, what should you do? Well, you need to consider strategies for dealing with a high tax environment. If you can pay taxes on something now to avoid paying later, you probably should think about doing it. There are certain investments you might want to make as well, but I don’t want the SEC breaking down my door. You can figure them out for yourselves. 

Whatever steps you take, do something. The fiscal landscape in the United States is going to change dramatically because it must. Make sure you are ready when it does. 

Remember…you were warned. 

* Editorial note: I do kid’s parties too!