The fourteenth stage of America’s Financial Endgame™ is where the US government makes large, sweeping increases to tax rates in an attempt to restore faith in the national financial solvency. By this point, the economy and financial market will have been through multiple years of turmoil. The inescapable trend of America’s Financial Endgame™ will be volatility. Every time there is a major financial or political disruption, the financial markets, commodity markets, and housing markets can be depended on to react with increasing severity.
Thus, the inevitable tax increases will serve as yet another catalyst to market volatility. First there will be volatility when the prospect of higher taxes is brought up in the national media, the financial markets are certain to start moving. the more intense the conversation gets, the more downward pressure will be placed on the markets. If the fears don’t materialize, the markets are likely to stabilize and possibly escalate. The seeming irony of situations like this is that the intelligent market players will all know the inevitable changes that are coming, but this eventuality will not be fully priced into the financial markets until it actually occurs. In this case, nearly everybody will know the taxes are coming, but the ride up to when they are actually passed into law will be a roller coaster of volatility that places extreme pressure on traditional investors who are depending on a 401k balance to increase or a pension fund to stay solvent.
The most likely source that the government will seek to tap for future tax revenues is the same place where it gets the majority of current tax revenues. The current mix of tax revenues stands with individual income taxes being the largest source of income, followed by production and import taxes, then social insurance taxes. When the government encounters an eventual need to dramatically raise tax revenues, these sources are the most likely places that will see significant increases.
The most likely form that this discourse will take is an exhortation on the part of populist politicians to raise taxes on “The Rich” to close the government revenue gap. As usual, there are two principal factors that will go completely unmentioned in this discussion. The first is that there are not nearly enough “Rich” people to close the tax revenue gap, and the second is that wealthy people have access to advanced tax planning through their attorneys and CPA’s which will allow them to be much more effective than average citizens at legally lowering their tax burden in accordance with the Internal Revenue Code.
What will ultimately happen is that the government will need to pass broad based taxes such as a “Value Added Tax” that ensnares the poor and middle class in continually escalating costs for the items that they purchase on a daily basis. Other likely sources for increased tax revenue will be increases in the tax rate for Social insurance. This will also be a particular burden to the poor and middle class since Social Insurance is assessed at a flat rate on the first dollars of income earned.
The thing that we need to remember in our preparations to weather America’s Financial Endgame™ is by understanding that any revising to the Tax Code will be written by politicians. These same politicians have a long history of writing exemptions, loopholes, and escape clauses in tax provisions that allow themselves and the people who support them to escape the high rates of taxation that they promise to lay on everybody else.
By paying close attention to the exemptions, loopholes, and escape clauses, you can learn how to use them to optimize your tax situation as well. It is unfortunate to think that we must use the same tactics as the political class to protect the financial wellbeing of ourselves and our family. Financial survival in the evolving world will require that our strategies adjust.
One way to think of this new paradigm is that Business is a game, that the game has rules, and that the rules are always changing. By learning the rules, and keeping on top of the changes to those rules, you will be placed in a position to play the game in a superior manner. The future is not something that needs to be feared. It can be frightening, but by learning the necessary skills and acquiring the necessary information, you can be confident in your ability to weather the upcoming financial storms and emerge stronger.
In the next article, we will be examining the fifteenth stage of America’s Financial Endgame™ where dramatic reductions to government spending are required to address the spiraling economic crisis.