Coach says that "timing is everything" when it comes to passing a football or placing a tennis shot. The same is true for economic planning.
While you and I plan on a calendar year basis, not so with governments. Their budget preparations, and fiscal years, occur at different times of the year, some in July and others in October.
Today, the federal government spends nearly 30 percent more than it collects. We are rocketing toward having the same debt ratios as European countries facing bailouts. As President Obama and Congress campaign on their laurels, the cracks in our economic structure grow larger.
China now prices oil in the Yuan, another assault against the U.S. dollar as the world's reserve currency. There isn't much oil being exchanged for the Yuan, but four years ago there was none.
Another bond advisory company downgraded the dollar within the last month. Meanwhile Senate Democrats report they are ready to study tax legislation and believe they can come out with a bill within 12 months.
If they're unsuccessful, then they will call for mandatory spending cuts. However, that "fiscal cliff" actually occurs in December. The Republican House speaker has made it clear that come then, House GOP members will not target millionaires and billionaires for punitive taxation, yet the Senate proposal is counting on that revenue. The president has said unless he approves of it, he will veto any legislation.
We are in gridlock and very likely will remain so for the next four years. Maybe, with a switch in the White House, things will change, but the House will probably remain Republican dominated and the Senate, Democrat controlled. Compromise would appear again to be out of reach.
All that being said, taxes probably aren't going to change for us this year, but not so next year. That reality impacts year end planning.
As individuals, we might delay charitable giving until next year when the rates will be higher so we get more tax deduction for our contribution. For the same reason, paying off interest accrued this year makes no sense if rates are likely to increase. The rule is get income accelerated into this year and defer deductions until next year.
This kind of thinking takes place because it's the best course to take when rates are rising.
Likewise, business will pay dividends at the end of this year and defer deductions until next. You will see stories next June that tax receipts are up for April taxes because of the actions of individuals and businesses. It will be heralded as the economy recovering, but it's really just the result of tax planning.
Forecasts for tax revenue will be too high because all taxpayers will be restructuring their financial affairs to pay as little as possible. Dividends, if the tax rate goes from 15 percent to the proposed 40 percent, will plummet. Stockholders will take a big dividend this year and none next year. Large, stock exchange traded companies can't easily change the timing of dividends but all other companies are much more flexible.
Both individuals and businesses will adjust to reduce their tax burden as much as possible. If Congress eliminated all deductions, I'd be OK with that, but it will never happen. Everyone has their own "sacred cow" and if Congress followed through with deduction elimination, they would never get re-elected. If our congressman raises our tax by eliminating our deductions, then we will eliminate our congressman in the next election.
Plan for next year as if your tax rate will increase, regardless of who is elected in a few weeks. Until we reform Social Security, Medicare, and Medicaid, we will remain in an economic lethargy.
Raising taxes takes investment money away from the private sector while cutting spending increases money for investment.
Leaving the government expenditures the same and reducing investment money by taxation virtually ensures further recession. Taxes aren't the problem, uncontrolled spending is the culprit.
As we escalate the size of government, we'll quickly see socialism/communism doesn't work as an economic system.
At least for now, we still are free to structure our incomes.