In this vlog/blog, I’m going to be addressing the issue of tax increases in the future. And nobody actually knows what taxes are going to do in the future, I don’t care if you’re the top economist in the country, they all cannot actually predict the future. All we can do is look to the past to help us understand, hopefully, what to expect. And that’s the beautiful thing about recorded history, is it gives us an opportunity to look backward in time and say,
“What were the indicators prior to this event happening that can potentially help us identify things moving forward?”
And I think if you’re a student of the history of taxation in our country, you’ll probably see that the marginal tax rate, as it relates to GDP, it’s gone up and down over the years. And we know that the most analogous period of time that we can look back and measure when you compare it to our current circumstances, would be the period between the Great Depression and World War II. Where we’re at now is very similar to those circumstances we had prior to World War II. We have a massive correction, the Great Depression, followed by severe civil unrest and then an actual military war. There are several different types of wars that you can have, but that was a military war.
Where we’re at now is we had a massive correction, 2008, massive civil unrest following a big round-up in the economy, and now we’re in the middle of a pandemic war. It’s a wartime economy and we have several wars going on in the meantime. We have a trade war, a geopolitical war.
Anyhow, when you look at previous charting, you can see a pretty obvious pattern with tax rates during those times, especially during a wartime economy. And in fact, we had a wartime economy during World War II, following a massive correction and very low rates. So what does that tell us? Well, it boils down to accounting. This is apolitical, whoever ends up in office, and we’re approaching a presidential election here, whoever ends up in office is going to end up with an accounting issue. And the government really only has two main sources of raising revenue and it’s all through taxes, but it’s taxes based on the GDP growth, and its income taxes, income, and payroll.
If you’re paying attention to the news, you know obviously that we have a massive decline in our GDP that has put us into what’s technically considered a recession. When there’s a drop in GDP, there’s obviously a drop in revenue. We had these huge bailout bills, we’re at a historical high national debt, and there’s really only a couple other things that we can do in order to bring that back down into balance, and again, it goes back to accounting.
So it’s really a matter of what we believe. If you believe that based on the cold hard data, that taxes will be likely to increase, and for the record, I don’t necessarily think and I think that most people don’t believe that this will just happen. We’re not going to wake up with two times the amount of taxes that we’re paying today. It’ll happen over time gradually, especially because we have such low-interest rates. The government is able to leverage the low rates, especially with the bailout packages that we’ve had. There’s an opportunity here for the government, at least, to leverage these lower rates in order to kind of use that to kick-start the economy.
The problem is there is danger, there is political risk, to rates increasing. If rates increase, there’s not a whole lot more they can do but to really start to kind of kick the tax increases into gear, which will probably push us further into a harder recovery. But anyhow, no matter which way you swing it, we’re, I think, around $27 trillion in debt at the time of this recording. Only a handful of months ago, we were three to $4 trillion below that, and that usually takes years, to build a couple of trillion dollars in debt onto our big country credit cards.
So it’s really, we’re kind of in a, I hate to use the word unprecedented because I don’t really like that word, but we are in a bit of an unprecedented scenario, but the reality here is if you look at the history of taxation, the reason why taxes were ever created, at least on the income level, was due to wartime economy, which we are in. The only thing that’s missing right now is a massive military war, which there’s a new rising in the world order, world power, anyways, a challenge to the current world power, which is China, which, that’s neither here nor there at this moment of time, but that could create a military war potentially in the future.
So it’s really not, again, not a matter of us being able to predict the future, it’s more about what we think is probably going to happen and this is the only other time in history, at least in the last a hundred years, that we’ve had our debt surpass, the debt-to-income ratio for GDP-to-debt go above 100% was around World War II. And we saw the highest marginal tax bracket, which that’s another topic for another time, but the highest marginal tax bracket at that time ended up being 94%. That’s just the federal bracket.
So we’ve already been there before. There are different theories out there of what will and what won’t work, but the reality here is that we already know that taxes will be going back to where they previously were before the Tax Cuts and Jobs Act, in 2026. So we already know we’re going to see a small increase. I think that the big question at hand is that’s, well, it’s five years away now, but the question is going to be, whoever gets into office or whoever takes over, it’s very hard to move that barometer, but will they implement a quicker increase in taxes or not?
We like to plan for probabilities and ensure against possibilities. It just would probably behoove anyone that’s feeling like they’re in a high tax exposure environment, whether that’s with your income taxation, your retirement, estate planning is a big one. They’re talking about removing the capital gains rate tax. So all these things are legitimate concerns that require a good, hard look, and you just have to ask yourself, given the situation that our country is in with the deficits that we have, not even including entitlements. Entitlements are a whole nother topic. I’ll do a completely separate blog on entitlements. They are not factored into the national debt. Again, a different topic for a different time, but given the situation that we have right now, I implore you to use critical thinking and plan accordingly.
Hopefully, that was helpful. Didn’t mean to scare anybody. It’s the reality of the situation and we just need to make sure that we’re doing the right planning to plan around these probabilities of taxes increasing. Ian Grove with RG Advisors. Thanks for tuning in.