Exploding U.S. Debt

Today we are talking about the problem of the coming tax storm.

We recently discussed the problem of the great American savings in our previous segment, “The Coming Tax Storm: Will it Affect Me?”

Hypothetically, if you set aside your money in 401Ks and defer those taxes, you will be in a lower bracket over time. That is not likely. You are now in a partnership with the US government. Your biggest concern is that your retirement will be derailed by taxes. You have IRAs, a 401K or 403B. Whether you take that money out voluntarily, or at the age of 72 via required minimum distributions, you might pay more taxes than you planned.

The problem with the current federal stimulus is that it is likely to raise tax rates in the future. The government has been spending like there is no tomorrow. At usdebtclock.org, you will see numbers in motion; they are not static. The numbers include the national household debt, consumer debt, and unfunded liabilities. What can you take away from that? Just two years ago, the US national debt was about $24 trillion. Today, it stands at nearly $31 trillion. Our government is amassing debt at an unsustainable pace.

You are the economist of your home. If your income is exceeded by your expenses (you're spending more than what is coming in), is that good economic policy? Absolutely not. Why should the government get a free pass? Well, they don’t. The government can print money anytime it needs by asking you and me to lend it money. China and other countries around the world lend the government money in the form of US bonds. How much debt can our country accumulate before no one wants to lend money to the government anymore?

US debt is considered pretty safe right now. However, Debt-to-GDP (Gross Domestic Product) ratio has increased from 115% to 130% in just two years. US debt is $31 trillion. The total economic activity in this country is $23 trillion. That is a massive Debt-to-GDP ratio.

\\ "You are the economist of your home."

People will begin to suspect the government does not have the wherewithal to pay them back. If the credit rating of the United States falls, interest rates will increase. Adjustments have been made by the Fed and through monetary policy, in an effort to cool things down. What will happen when the world increases our rates because they want to be paid well for our low-quality debt? That is a problem. The government is going to be pushing for more revenue.

If you don’t plan in advance, you are going to get caught in the snare. Here’s a great quotation: “Failing to plan is planning to fail.” If we don’t get ahead of the problem, we will be the victim.

If you do want to pay more taxes, wait around for the bracket changes. Your tax bracket will go up in 2026. No matter what, the Tax Cuts and Jobs Act will expire. Historically, Congress lets laws expire because they are no longer useful in politics; they were relevant to a prior generation of senators and congressmen. Look at current deficit and entitlement spending. Stimulus packages have acquired trillions of dollars in new debt. We’re almost guaranteed higher tax rates as a result. Deductions will expire as well. Congress doesn’t want to vote on tax increases, but will surely let deductions expire.

If this concerns you, Lord and Richards can help you develop a written tax plan to achieve financial independence.

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