Sometimes it’s easier to avoid uncomfortable realities and hope that the bad thing never happens. Before we go any further, I want you to take 10 seconds of your time and click on this link. It shows that our national debt is over 30 trillion. Needless to say, a trillion is a lot of money. Thing is that this is not the worst of it. Oh no, it gets much, much worse. See, there are obligations like Medicare that are not carried on the books. According to this article “But beyond the debt figure typically used, Reason Foundation’s analysis of the latest federal financial report published by the U.S. Department of the Treasury in February finds that federal liabilities, when including obligations from entitlement programs, exceed $100 trillion. Unfunded future Medicare obligations account for almost 47 percent of that total.”
It goes on to say “Much of this debt is now coming due as a large cohort of Baby Boomers retire and become eligible for Social Security and Medicare benefits. Baby Boomers began reaching early retirement age in 2008, and the last Boomer will reach full retirement age in 2031. In the 2030s and ‘40s, the annual trillion-dollar budget deficits needed to pay for these benefits will take America’s debt and deficits to largely uncharted territory.”
The United States has been financing its debts with short-term bonds of which most mature every 30 days. According to this article “This year, the federal government will spend $300 billion on interest payments on the national debt. This is the equivalent of nearly 9 percent of all federal revenue collection and over $2,400 per household. The federal government spends more on interest than on science, space, and technology; transportation; and education combined. The household share of federal interest is larger than average household spending on many typical expenditures, including gas, clothing, education, or personal care. “
Furthermore “Even with exceptionally low interest rates, the federal government is projected to spend just over $300 billion on net interest payments in fiscal year 2021. This amount is more than it will spend on food stamps and Social Security Disability Insurance combined. It is nearly twice what the federal government will spend on transportation infrastructure, over four times as much as it will spend on K-12 education, almost four times what it will spend on housing, and over eight times what it will spend on science, space, and technology.”
Now, this level of spending on interest is happening with interest rates at near-record lows. What do you think is going to happen to this interest expense as interest rates continue to rise as they already have been? I’ll tell you what is going to happen, the government is going to have no choice but to raise income tax rates, a lot.
Now you can do what Wile E. Coyote did when Buggs Bunny moved his house on the tracks of an oncoming train and just lower the window shade and hope for the best, but in the end, you will likely have the same result as Wile did and get pummeled in the end.
The reality is that it is mathematically inevitable that tax rates are going to rise, a lot. We already know that the last set of tax cuts is set to expire in 2026. From this article “Tax rates are changing through 2025 across the income spectrum. In 2026, the changes will expire and 2017 rates will return, absent further legislation.” Of course, given our current situation, there is close to zero chance that Congress will not let higher income tax rates resume.
Not only will tax rates rise by default, you can bet that we are going to see much higher personal tax rates in the near future. The question you need to ask yourself is what is your best financial strategy going forward.
Right now, your primary focus should be on having as much of your retirement income as possible come from tax-free sources so as to minimize or altogether eliminate your exposure to higher income tax rates.
I can show you how to arrange your financial affairs so that you pay little to no income taxes. Click here to set up a time for us to discuss how you can be in a zero income tax bracket.