Hold Onto Your Wallets!
The tax cuts of 2001 and 2003 that George Bush enacted are set to expire on 12/31/10. These fantastic tax cuts supercharged the economy from the devastating solar-plex blow of 9/11.
Those tax changes propelled the economy to unpredicted GDP growth, doubled the stock market over 5 years, brought huge tax income into the U.S. Treasury and gave relief to overtaxed U.S. citizens at every level. The number of tax code changes from those cuts are too numerous to cite in this article. My favorites are the across the board reduction in tax rates; a drop in dividend tax rates from 39.5% to 15% which have benefited everyone especially our senior citizens that depend on fixed income; a drop in capital formation taxes from 28% to 15% that have helped create jobs and increase everyone’s wealth, and, a drop in the deficit below any one’s wildest expectations even as Congress spends more.
I have seen all my clients … “happy” and not under stress due to the lowering of taxes. Every American with more in their pockets have been spending the excess dollars (God Bless the American consumer … they know how to spend) which lead to the growth in GDP and jobs. Those that did not spend, saved and invested the excess money which led to a lowering of interest rates to record levels.
A funny provision of the tax cut was that Democrats in Congress insisted on a “sunset” provision. That is, all these cuts and happiness must end by 12/31/10. Funny how they NEVER put a “sunset” provision on any tax increases – hmmm.
The sad part of your fortunes is as I write this EVERY Democratic Presidential candidate has said they will increase taxes immediately after 12/31/10. “She” has said that if “she” is elected her first order of business the day “she” is inaugurated – is to “roll back” all of Bush’s tax cuts to pre 2001 levels … Hmmm! In addition, Charles Rangel, head of Ways and Means Committee Tax Writing, who has been Ms. Clinton’s puppeteer, is in full agreement with her plan. If “she” is not elected and any other Democrat is elected President he will push for her Inauguration Day plan. The bill would raise all tax brackets by as much as 10%. So if you are now paying 35% it is set to go to 44%. That is a 25% increase in their tax take and a 25% drop in your “keep” rate.
I have advocated in this column countless times that everyone knows taxes will go up. This is not just in the next few years but continually in the future. Why? To simply fund the generation long war on terror, to prop up the underfunded/bankrupt Social Security/Medicaid bill for the coming Baby Boomers, and to pay for Congress’ insatiable appetite to spend for votes.
What can you do?
- Meet with your advisor immediately to take action on strategies in 2007 with lower rates and do similar planning to take action in 2008.
- If you buy stock or capital assets now you will have your 1 year holding take place before the end of 2008.
- Begin now to do strategic rollouts of your IRA/401K plans. You do not have to be retired to do this. If taxes are going to be higher later then why wait (see all past articles on Missed Fortune).
If the Republicans win the White House and the Democrats do not have a majority in Congress then we will get a reprieve. The above strategies still make sense for the long term, but hold onto your wallets.
Ah, Discipline now — or Regret later!