Government affairs expert Andrew Friedman offered a warning to financial advisors to prepare for a steep rise in taxes likely to take effect just one year from now.
In a just-released whitepaper, Friedman, a principal in the Washington Update and a fixture on the financial advisory lecture circuit, outlined a number of scenarios that could take place following the congressional supercommittee’s failure to meet its deficit-cutting deadline last week. Friedman also offered financial planning ideas that advisors and investors could undertake to prepare for rising taxes, in a separate interview with AdvisorOne.
Friedman’s white paper argues that the supercommittee’s failure to reach an agreement was hardly surprising in the absence of a “forcing event” that in recent times has been necessary to break the political impasse in Washington. It was the imminence of a government shutdown in April that forced a congressional deal last April and the risk of a default on the national debt that prompted the August budget agreement (under which the supercommittee was created).
But, since that August deal included automatic (“sequestration”) budget cuts if the supercommittee failed to meet its deadline, there was no forcing event strong enough to induce the parties to make decisions their core constituencies would find unacceptable at this time.
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Friedman underscores just how strong a forcing event must be, noting earlier errant forecasts about a downgrade in the U.S. credit rating and ensuing severe decline in equity markets: “Both of those events happened, yet Congress did not act. I obviously underestimated Congress’s tenacity to do nothing,” he writes.
Post-supercommittee, the next battle over the budget will center on three major issues that must be resolved before the end of this year. First is the payroll tax, which will return to the usual 6.2% rate if Congress does not renew a temporary reduced rate of 4.2% set to expire at year end; the president wants to further reduce the rate to 3.1%.
A provision allowing investors to move up to $100,000 from an IRA to a charity to satisfy the required minimum distribution without incurring tax, and a “doc fix” that will avoid a 30% cut in Medicare reimbursements must also be addressed in the remaining weeks of the year.
Says Friedman: “If Congress passes these measures, the lost revenue in 2012 will exceed the entire 2012 cost savings achieved from the debt limit deal that consumed Washington this summer. In other words, after all the rhetoric, drama, and focus, the deficit actually would be slated to increase in 2012.”