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June 03, 2020 at 04:40 PM
Laurence Kotlikoff.
Get ready for higher tax rates at the national, state and local levels, especially to help finance the additional debt that governments have incurred during the COVID-19 pandemic.
“Whatever party is in power we’re likely to see a significant increase in taxes or reduction in benefits for those who are wealthy,” says Larry Swedroe, principal and director of research for Buckingham Strategic Wealth. “We almost certainly will see a dramatic increase in the wages that are taxed.”
Swedroe, along with economist Larry Kotlikoff, spoke at a recent webinar on the pandemic’s impact on wealth management at The American College of Financial Services moderated by Michael Finke, a professor of wealth management at the college.
According to the Committee for a Responsible Federal Budget, the U.S. budget deficit is expected to hit $3.8 trillion this fiscal year, and the federal debt — the total of all previous deficits — will reach 106% of GDP in 2022, the same record set in 1946.
As a result of its ballooning debt, the federal government might consider taxes that it never seriously contemplated before such as a value-added tax, carbon tax, or even a wealth tax, wrote Howard Gleckman, senior fellow at the Tax Policy Center, in a recent post. “Lawmakers may also look at new ways to tax assets of the wealthy at death,” he wrote.
Swedroe and Kotlikoff agreed that given the outlook for higher taxes, advisor clients should consider converting their traditional or rollover IRA into a Roth IRA now. Clients will pay taxes now on the money that is converted in order to enjoy tax-free withdrawals later. Moreover, if the value of an IRA has dropped during the pandemic, its tax burden today may have also declined.
