From the April 2013 issue of Investment Advisor • Subscribe!

April 1, 2013

The Most Wonderful Time of the Year

More On Tax Planning

from The Advisor's Professional Library
  • IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
  • Cafeteria Plans The income tax treatment of cafeteria plans is key to their popularity. Learn how to maximize the tax benefits of these “flexible benefit plans”.

At this point, supply-side economics have been examined, analyzed, debated, celebrated and rejected ad nauseam. Cut taxes, the theory goes, and the money that would have gone into government coffers is instead invested in the private economy. How you feel about the theory has less to do with how you spend and more to do with how you vote. 

However, recent analysis from the nonpartisan Tax Foundation gives hope to Reaganites everywhere, who in this decidedly demand-side environment are sorely in need of a boost.

The foundation’s conclusions focus specifically on the budget sequester, but it isn’t a great leap to extrapolate to the economy at large.

Instead of cutting government spending on so-called discretionary programs, wrote Richard Morrison, manager of communications for the Tax Foundation, sequestration should target entitlement programs.  

“The major source of increased federal spending in recent and projected years is from entitlement spending, and this is left largely untouched by the sequester,” added chief economist William McBride. “Research indicates that it would be better for economic growth, short-term and long-term, to cut mandatory spending.”

The worst option of all, which has already been suggested by some lawmakers, he diplomatically noted, would be to replace the sequester in part or whole with higher income taxes.

“Economic research has shown that the vast majority of countries that have successfully reduced their debt from the levels the U.S. is experiencing today have done so by reducing spending rather than increasing taxes.” (The Tax Foundation says it is nonpartisan to protect its 501(c)3 status—I think they might be fibbing.)

Whatever the result of the D.C. donnybrook, tax season 2013 brings its share of challenges for this year and beyond. This is why our cover story on the top tax reduction strategies is so relevant. If you’ve already instituted some of them and your clients are reaping the benefit, then great. If not, the sting of the recent tax bite should be enough to get the conversation going and carry it through to next year.

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