Taxing the future and tackling the federal debt

Doug Horn

As you should be aware, our legislature is grappling with the Federal budget, Federal services, and its revenue. In other words, they are grappling with our future and potentially how we live.

Many of the changes coming out of this legislative tug-of-war will most likely have its impact on the American citizens in 2012 and beyond. Everyone should be aware, this is by design and not by chance. If bad news is tucked away or its impact until late 2012 and beyond, many of those drafting and supporting the upcoming tax increases may already be safely reelected.

While new taxes may be a reality and a necessity, the potential failure of our legislature to address the cause of the excessive budget deficits is a greater problem. Many governmental agencies have grown in size and services provided over the last several decades. The larger the governmental body (state over city, Federal over state) thus the greater number of citizens it serves, it is less likely it will take the difficult position of reducing significant services when those services can no longer be economically provided. It seems it is easier to fund these services with additional debt or new taxes on the fewest number of constituents possible, rather than acknowledge the service must be revamped because it is not affordable.

The fact the Federal debt ceiling (the U.S.’s credit limit) must be raised within the coming months is an obvious symptom spending is far exceeding revenue. I wish I had the opportunity to increase my own credit limit anytime I needed. That may sound appealing, but my guess is it would lead to financial crisis rather than prosperity. The addition of debt is generally taken out with the intension of its ultimate payment. It does not appear the U.S. may ever pay off its debt.

Millions of Americans found out the problem of maintaining debt levels rather than paying them off. Once interest rates began to rise on the existing debt, an amount once manageable became a burden that drove many to reduce their lifestyle or to financial ruin. The United States may be facing a very similar crisis. Since the total U.S. debt is reaching record levels, as interest rates increase in the future, more and more of the Federal revenue will be forced to be used to pay the interest. At this point, services must be reduced to provide the funds to pay the higher interest or more debt will have to be issued. Kicking this can into the future is not a responsible solution.

Receiving significant governmental services for free or for fees far below the services’ actual cost may be enjoyable and even desirable, but we must remember the actual cost must be paid by someone. The U.S. does not have the luxury of funding its services from the sale of government owned resources, such as oil to other nations. For those countries, the citizens do not feel the burden of the cost of the services they receive from the government. However for the United States, the revenue required to fund our highways, defense, Social Security, Medicare, Medicaid, and the hundreds of other services, grants, and expenses is squarely on its citizens. If your annual Federal tax bill is low or nonexistent, then someone else is paying your share.

Without real reduction in the spending in our governments, the impact on investment portfolios and the future cost of living may change significantly. Paying more for the services we receive or perhaps receiving fewer services is a real possibility. Future budgets must be able to handle this change, thus larger retirement savings balances will be required.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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