Introduction
As we look ahead, several forces are converging to create a future where tax rates are almost certain to rise. Each of these factors play a crucial role in the tax environment and understanding them is key to preparing for what lies ahead.
The Expiration of the Tax Cuts and Jobs Act
One of the most immediate reasons to expect higher tax rates in the near future is the expiration of key provisions of the TCJA at the end of 2025. If Congress does not act to extend these provisions, the top marginal tax rate will revert to 39.6%, and other tax benefits will also disappear. This will result in higher taxes for most Americans, but the impact will be especially pronounced for high-income earners.
This looming tax increase presents a compelling case for paying taxes now at known rates rather than deferring income and risking much higher rates in the future. By locking in today’s lower rates, entrepreneurs can protect their wealth from future tax hikes and take advantage of the current “tax sale.”
Chart 2: Percentage of public debt to GDP versus the highest tax rate (1930-2020)
Government Debt and Fiscal Responsibility
The U.S. national debt has surpassed $33 trillion, and the cost of servicing this debt is rising as interest rates increase. In 2023, interest on the national debt accounted for over $400 billion in federal spending, and this figure is expected to grow significantly in the coming years. This level of debt is unsustainable, and addressing it will require either significant spending cuts, increased revenue through higher taxes, or a combination of both.
Historically, periods of high government debt have been followed by increases in tax rates. After World War II, for example, the top marginal tax rate remained above 90% for nearly two decades as the government worked to pay down war-related debt. While today’s political climate is different, the fundamental need to manage debt remains the same.
Given the current fiscal trajectory, it is almost certain that taxes will need to rise to address the growing debt burden. High-income earners, in particular, are likely to face higher tax rates as part of this effort.
Demographic Changes and Social Programs
The U.S. faces significant long-term fiscal challenges related to Social Security, Medicare, and Medicaid. These programs are under increasing pressure due to the aging population and rising healthcare costs. As the Baby Boomer generation continues to retire, the ratio of workers to retirees is shrinking, putting additional strain on these entitlement programs.
To keep these programs solvent, the government will need to find additional revenue. While reforms to these programs are possible, they are politically challenging, making tax increases a more likely solution. High-income earners, who benefit the most from the current tax structure, are likely to be targeted in any future tax increases aimed at funding these social programs.
The Political Climate and Wealth Inequality
The growing concern over wealth inequality in the U.S. is another factor that could drive higher tax rates for high-income earners. The gap between the rich and the poor has widened significantly over the past few decades, leading to increased calls for progressive taxation.
Politicians and policymakers from both parties have proposed various measures to address wealth inequality, including higher taxes on the wealthy. Proposals such as a wealth tax, higher capital gains taxes, and increased estate taxes have gained traction in recent years. While these proposals have yet to become law, they reflect a broader trend towards greater scrutiny of the tax advantages enjoyed by the wealthy.
As public pressure to address wealth inequality grows, the likelihood of higher taxes on high-income earners increases. Entrepreneurs and wealthy individuals should be prepared for these potential changes and take steps now to protect their wealth.
The Strategic Case for Paying Taxes Now
Given the inevitability of higher future tax rates, successful entrepreneurs should seriously consider paying taxes now on their income at the current lower rates. By doing so they can shift as much after tax income as possible across the tax-free finish line. Here are strategic reasons to do so:
- Certainty in a Time of Uncertainty
The future of tax policy is uncertain, but one thing is clear: today’s tax rates are among the lowest in modern history. By paying taxes now, you can lock in these rates and avoid the risk of higher taxes in the future. This certainty allows you to plan your financial future with greater confidence.
- Maximizing Tax-Free Investments
By paying taxes now, you can convert taxable income into tax-free investments, such as Roth IRAs, cash value life insurance, or municipal bonds. These investments grow tax-free, providing you with a source of income that won’t be subject to future tax increases. This strategy can help protect your wealth, provide greater income flexibility in retirement, and potentially leave a tax-free legacy to your loved ones.
- Leveraging Low Tax Rates for Business Planning
If you’re a business owner, now is the time to take advantage of low tax rates for business planning. You must shift your focus from current year tax-savings strategies to lifetime tax savings strategies. Consider strategies that accelerate income rather than defer it to future years. By foregoing deductions such as tax-deductible expenses and depreciation, and instead paying taxes at today’s lower rates, you can shift more dollars across the tax-free finish line. This will result in a reduction of your lifetime tax liability and increase your tax-free wealth.
- Gifting and Estate Planning
With today’s low tax rates, it’s an ideal time to consider gifting assets to family members or setting up trusts. By transferring wealth now, you can take advantage of the current gift tax exemption and lower rates, reducing the overall tax burden on your estate. This is particularly important given the possibility of future changes to estate and gift tax laws that could decrease the exemption amounts and increase the tax burden on wealth transfers.
Conclusion: The Time to Act is Now
There’s a huge tax sale happening right now! This is not just a marketing slogan; it’s a reality. The current tax rates are some of the lowest in U.S. history, and the window of opportunity to take advantage of them is closing fast. With the expiration of the TCJA provisions looming and the growing fiscal challenges facing the U.S., higher tax rates are almost inevitable.
For successful entrepreneurs and high-income earners, the strategic move is clear: pay taxes now at known rates, avoid deferring income, and shift as much of your net income as possible into tax-free investments. By doing so, you can secure your financial future, protect your wealth, and build a foundation of tax freedom in retirement.
The time to act is now. Don’t miss out on this once-in-a-lifetime tax sale. Take control of your financial future and make the most of today’s low tax rates before they disappear.
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