I don’t often talk about politics here at Rich Retirement Letter. And it’s not that I don’t have opinions.
But over the past few years, our culture has reached the point where any discussion of a political opinion seems to hurt relationships with people who don’t agree with you.
And it makes people who already agree with you all the more entrenched in their own opinion.
This isn’t a great way to encourage thoughtful discussion.
More importantly, I never want my discussion of a political issue to hurt my relationship with you.
Because I’m thankful you’re part of our Rich Retirement Letter community. And I don’t want my opinion on a particular issue to come between us.
But when it comes to issues that affect your ability to live a fulfilling and enjoyable retirement, I just can’t keep quiet.
And today, when I see some of the government spending plans and hear how the Biden administration plans to pay for this spending, I’m very concerned.
I want to make sure we’re all able to look at these spending and tax plans objectively and understand how they will affect our country, our wellbeing, and ultimately your Rich Retirement.
“Who Cares If We Tax Corporations?”
Over the last few days, details of President Biden’s new tax plan have begun to emerge. And I have to tell you, they’re not pretty!
It all starts with the administration’s infrastructure plan, which aims to spend $2.3 trillion over the next eight years.
Part of this package is directed at projects that you would typically associate with infrastructure spending. For instance, the plan aims to:
- Modernize 20,000 miles of roadway.
- Install 500,000 electric vehicle charging stations.
- Replace lead pipes and service lines.
- Repair aging school buildings.
There’s broad support from both Democrats and Republicans for these infrastructure initiatives.
But the plan has drawn criticism because a large part of the $2.3 trillion will be allocated to social projects that don’t actually fall under the “infrastructure” category.
The scope of spending and how it’s all lumped together in this one single bill is a discussion for another day.
Today, I want us to look a bit more closely at how this $2.3 trillion package will be paid for — and how that will affect your retirement.
Biden plans to pay for this spending primarily by raising the tax on corporations.
Currently, the maximum corporate tax rate is 21%. But under the new proposal, corporations will be required to pay 28% of their profits to the government.
That may not sound like a huge deal. But it represents a 33% increase in the amount of money being sent to the government.
I fear that most Americans won’t truly understand how this tax hike could significantly affect each and every one of us.
After all, who cares if companies are required to pay more?
Corporations have plenty of money and it’s not hurting anyone to send more of that cash to the government, right?
Corporations Don’t Pay Taxes, YOU Pay Taxes!
While it may sound great to make corporations shoulder the bill for this new infrastructure plan, it’s important to realize who truly bears the burden over time.
“Corporations don’t pay taxes… PEOPLE pay taxes.“
This age-old statement may not sit well with some of the politicians in Washington who want you to believe that it’s ok to take more money from those “evil corporations.”
But the truth is that corporations belong to the people of the United States.
And when you tax the earnings that corporations make, you are in fact adding to the tax burden that everyday Americans are forced to pay.
Some would argue that the majority of stock positions are held by the wealthiest Americans as if this is a reasonable justification for the government taking a bigger chunk of a company’s earnings.
But remember, companies are also owned by pension plans that pay blue-collar workers’ retirement programs.
They’re owned by endowments tasked with helping to make education affordable for all students.
Corporations are owned by insurance companies who use profits from these investments to keep your policy rates low and to pay for damages.
And hopefully, corporations are owned by you as you purchase shares of stock to help grow your retirement wealth.
So when the government raises the tax rate on corporations, you and I will ultimately see those higher tax rates cut into the wealth we can generate from our investments.
At the same time, higher corporate tax rates also hurt consumers and employees.
Since corporate taxes are an expense of any business, the higher tax rates are, the more these businesses will have to charge for the products and services they offer.
So even if you never own a share of stock (and don’t have a pension plan, insurance policy, or any other exposure to stock prices), you’ll still wind up paying more for what you buy because of this tax hike.
Similarly, companies will need to cut other expenses to offset higher tax expenses. And that means when tax rates surge higher, more employees will be laid off.
We saw a surge in job creation four years ago when corporate tax rates were revised lower.
And it would be naive to ignore the potential for many of those jobs going away once Biden’s tax hike goes into effect.
The Insult of Multiple Tax Payments
While we’re on the subject of taxes, I’ll get one more thing off my chest…
Did you know that as an investor, you pay taxes twice on every dollar you earn?
Consider this: For every dollar of profit a company earns, the government gets to keep its share of the corporate profits.
But as an investor, once those profits are distributed to you, the government steps in once again and charges you a second round of taxes on that same dollar of profit!
Whether the company pays you directly through dividends,\ or simply grows in value causing the stock price to go higher, you still have to pay personal income taxes on investment gains and dividends.
So you’re paying taxes on profits that have already been taxed at the corporate level.
Oh, and then don’t forget… When you spend your income (that has already been taxed twice), the government will also charge a sales tax at the cash register.
So the truth is, the government gets multiple shots at taking a cut of every dollar you earn and spend.
It’s a system that’s become very complicated and ingrained in our day-to-day lives to the point where we don’t always even recognize how much of our own money is being taken from us along the way.
It’s frustrating to me, especially when I see how wasteful the government can be with the capital that is confiscated.
Of course, I’m all for contributing my fair share to help provide for the safety and the essential services that our country provides for us.
But at some point, the multiple tiers of taxation become a bit unreasonable!
Solution: What Should You Do?
Ok, I’ll get off my soapbox now and get back to your retirement.
As a retiree (or an investor planning for retirement), what should you do to protect yourself?
The first thing I would recommend is to make sure that you’re using the tax advantages that come with retirement plans like a 401(k) or IRA.
If you invest in one of these tax-deferred or tax-free accounts, you’ll be able to grow your retirement wealth without paying personal taxes on annual gains.
With traditional 401(k) plans and traditional IRAs, the gains you accumulate can continue to grow while they’re in the account.
You only pay taxes on the money you take out of these accounts. This is a great way of using compound gains (essentially profits on profits you’ve accumulated) to grow your wealth.
Investors also have an option to use a Roth 401(k) or a Roth IRA for their retirement accounts.
This type of account doesn’t allow you to take a tax deduction when you put money into them. But the advantage is that you’ll never be taxed on any of the profits that accumulate over time.
Both plans can help you grow your wealth while avoiding the annual tax payments that can cut into your retirement savings.
Beyond that, I would suggest investing in companies that will benefit from this $2.3 trillion infrastructure plan.
While we may not have control over what gets spent and how taxes are assessed, we can at least pick out the stocks that will benefit from massive government spending.
We’ll keep talking about the stocks in the materials sector, equipment industry and plenty of other areas that will profit from this infrastructure bill.
In the meantime, enjoy the holiday weekend and I’ll see you next week!