“If I decide to give you my house and car when I die, how much do you think you should pay the government?”
We were driving to school when I posed the question to my 6th-grade daughter sitting in the back seat.
Her big sister immediately scowled at me, wondering why Emma would be the one to get the house instead of her.
“Why would I have to pay the government anything?” Emma naively asked.
“After all, it’s up to you who you want to give your stuff to. And the government shouldn’t be able to take something from me just because you gave something to me — should it?”
Frankly, I envy her perspective. And after Biden’s speech to Congress last night, I’m more than a little concerned about her future here in America.
You see, we’re entering a new era for the United States — one where perspectives are shifting on many important issues.
These are important issues like the government’s role in our society, property rights for private citizens, what an “equal playing field” really means, and how free markets will operate going forward.
We don’t usually get too political here at Rich Retirement Letter.
But today, I want to share some of my thoughts on how the new political environment will affect your retirement. And I’d love to hear your thoughts as well!
So please use the link above to share your perspectives on the issues in play right now. Let’s jump in!
A Few Trillion Here, a Few Trillion There…
To say the Biden administration’s spending plans are bold would be quite an understatement.
The president introduced his American Families Plan this week, which features proposed spending of $1.8 trillion. The plan is focused on providing funds for childcare, education and paid leave.
And while all of those initiatives sound good, details for how the programs will be rolled out are still unclear.
If you’ve been a member of our Rich Retirement Letter community for some time, you know that I’m a dad. You know that I value my children’s education and that spending time with them is my top priority.
So I have no problem with the Biden administration putting family values near the top of the priority list.
But when the government decides to spend $1.8 trillion on a vague plan to help with education and childcare, my concern for exactly how this money will be spent (and where it will come from) is immediately triggered.
On top of the American Families Plan, the administration is also proposing a $2.3 trillion infrastructure plan that reads more like a laundry list covering the president’s campaign promises rather than a bill that truly focuses on infrastructure spending.
Education, electric vehicle incentives, technology research and medical initiatives may all be important issues to consider.
But many people are concerned that lumping these spending initiatives into a broad infrastructure bill will lead to government spending that is liberal and not carefully monitored.
The resulting waste and inefficiencies could lead to some very difficult situations down the road — especially considering the price tag for these two proposals alone!
The Danger of Unintended Payment Consequences
With the price tag for these two proposals tallying more than $4 trillion (with a “T”), we should all be concerned about how these proposals will be paid for.
The Biden administration has laid out a plan with several different tax hikes to help pay for this spending.
And while these tax hikes are likely to be popular with the current American culture, I have some big concerns.
Often, there are unintended consequences that occur when tax rates are moved sharply higher. And these consequences could not only leave the government with less revenue than expected, but they could also damage your retirement savings.
Let’s take a look at some of the tax shifts that the Biden administration is proposing.
First, the president announced a plan to increase the corporate tax rate from 21% to 28%. Theoretically, this move would bring in an extra $2.5 trillion over the next 15 years.
Next, the Biden administration plans to increase the top rate on long-term capital gains from 20% to 39.6%. This is nearly double what investors, real estate owners, and business owners have previously paid when exiting a position.
And the third big tax hike is a proposal to increase the estate tax (a tax levied on savings passed down from one generation to another) to a 40% rate.
So now, almost half of a family’s wealth could be taken by the government instead of allowing parents to pass this wealth to children and grandchildren.
(Incidentally, I found myself in a bit of a heated discussion on Twitter when this topic came up. Apparently, there’s a lot of support for what I consider confiscation of family assets. I’d be curious to hear what you think!)
Altogether, these major tax increases have the potential to raise a lot of money for the government. But they also have the potential to do an incredible amount of damage to our economy!
By raising corporate taxes, the Biden administration risks sparking more inflation as companies raise prices to offset tax expenses.
It risks damaging the job market as companies reduce hiring thanks to lower after-tax profits.
And it risks stifling innovation as companies with higher tax burdens have less money to invest in research and development.
At the same time, higher tax rates on capital gains will make it less attractive for the wealthiest individuals to invest in stocks, real estate, or in their own businesses.
This risks making our capital markets less efficient, choking off funds for new innovative businesses and could even lead to a sharp market pullback.
After all, investors will naturally want to sell positions now before new tax rates take a bigger chunk out of gains.
I’m also concerned about families with small businesses that collectively employ hundreds of thousands of people.
If these small business owners face a 40% estate tax when they pass their business on to their heirs, we could see many small businesses liquidated or sold to larger corporations.
Ultimately, the long-term consequences of these higher taxes could severely damage the entrepreneurship spirit in America that has been so foundational to our success.
How to Protect Your Retirement From Big Government
I should tell you that I’m personally a bit uncomfortable talking politics with our Rich Retirement Letter family.
It’s not because I don’t have my opinions.
(You can see I can be pretty passionate when you get me started talking about free markets, your retirement savings, your rights to pass your wealth to the next generation and more.)
But I know that there are many different perspectives out there.
And I don’t want to offend you or make you think that I’m arrogant enough to think that my opinions are always the right way to think.
I’ve got a lot to learn and certainly have had a lot to ponder with the new Biden administration.
But I’ve spent my entire career learning about how to grow and protect your wealth. And I’ve watched as different policies from Washington have affected this objective.
In today’s market, I think it’s very important that you think carefully about how to protect your investments from rising tax rates.
Of course, we do want to pay our fair share of taxes and see that money put to good use in programs that help our country be more competitive and raise the standard of living for everyone.
But to protect your wealth and the wellbeing of your family, it’s important to keep as much of your investment wealth in tax-sheltered or tax-deferred accounts like a 401(k) or IRA account.
This is a good way of letting your wealth compound over time without having to pay tax rates that truly cut into the wealth you work so hard to accumulate.
I would keep a close eye on how corporate taxes affect the companies you invest in.
Many companies are already paying reasonable tax rates. And an increase in the corporate tax rate will be less of a shock to these investments because investors will only face an incremental increase in taxes.
For the most part, these are mature and profitable businesses — the kind of value names that have been so strong over the last few months.
On the other hand, growth stocks (specifically those in the tech space) have historically been able to avoid paying taxes.
That’s because many of them have already invested huge sums in research and development. And they can continue to write off these investments for years to come, letting them claim zero accounting profits and avoid paying taxes.
As the Biden administration’s corporate tax plan kicks in, we could see a much larger shock to these names, sending the stock prices sharply lower.
And remember, these types of selloffs typically happen before the actual tax expenses hit. Because investors will start selling once it becomes clear that this new policy will affect their positions.
Investing in hard assets like gold, silver and even industrial metals like copper will also be an important way to protect your wealth against inflation.
We’ll be keeping a close eye on the political landscape and how it affects your retirement wealth. So you can expect more updates on this topic in the coming weeks and months.
I’m very curious to know your perspective!