Your Personal CFO: What should happen with taxes?

There has been a lot of debate on Capitol Hill about what to do about taxes with the impending expiration of the Bush-era tax cuts.  Some politicians have seen this as an opportunity to pit rich against poor and begin to position their respective parties for the 2012 presidential election.

The president seems to be falling in the middle, given some of the proposed solutions that have been identified this week.  At the time of this writing, a proposal to extend the current tax rates for two years is being considered.  In addition, there would be an increase in estate tax exemption threshold to $5 million.  The threshold would have reverted to $1 million without a change.

So what do you think should be done about taxes?  From a short-term perspective, lower taxes may be an aid to our struggling economy, particularly with unemployment hovering just below 10 percent.  In the long run; however, our current tax structure will not be sufficient to cover the cost of all our future liabilities such as Medicare/Medicaid, Social Security and the repayment of all our outstanding debt.

Answering this question is difficult and your answers will probably vary depending on your age and whether or not you have children or grandchildren.  The prospect of paying higher taxes may not sit well with you if you feel like you are struggling already.  While it would be a burden, the longer we take to begin straightening out our country’s financial situation, the higher future tax rates will have to be.  Remember that as the babyboomers continue to retire, there will be less and less workers paying taxes.  The pure math of this is enough to make you think twice if you give it some thought.

Historically speaking, we are paying taxes at the lowest rates in the last 50 years.  This is while we are fighting wars on two fronts and are in the midst of the largest demographic change our country has experienced in modern time.  During times of war, it is typical to increase taxes to help cover the cost.  The Bush administration chose a different route and decided to lower taxes during a period of rapid spending increases.  This move may have provided a short-term benefit to the economy after the 9/11 attacks and the recession of 2000, but it is clear that we will be paying this off for generations to come.

As much as our esteemed politicians want us to believe this is a partisan issue, the future welfare of our country is blind to red or blue.  If you have any interest in a deeper discussion of our financial condition, I urge you to read Comeback America: Turning the Country Around and Restoring Fiscal Responsibility by David Walker.  He served as Comptroller General (U.S. chief auditor) under Presidents Bush Clinton, and Bush.  Mr. Walker points out in a non-partisan way the depth of our financial issues and his thoughts on what we need to do to begin addressing them.

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. Your Personal CFO appears on NEast Philly every other Tuesday. You can view our other columns here.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor.  Family Wealth Services, LLC and Cambridge are not affiliated.

Jim Heisler, CFP®, CDFA™, CASL™

Family Wealth Services, LLC

8725 Frankford Avenue

Philadelphia, PA 19136

jim@familywealthservices.net

215-332-4968

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