Transcript: Segment 3
Paul Winkler: And we’re back here. Investor Coaching Show, Paul Winkler, along with Mr. Ira Work and Mr. Jim Wood talking about the role of money and finance, and you can check out the website, paulwinkler.com, where you can see audio, video, and the podcast download of any segments that you miss, you can pick up right there. And it’s pretty cool and the website’s coming right along. And the other thing that I want to make sure I just keep mentioning that is on this Thursday, I’ll be doing a webinar.
The last webinar was live. We had a ton of people on it, and I think that it’s going to be the same thing for this one. Matter of fact, we had to upgrade even above what we had had last time, just because of the number of people that signed up first day that we announced it, but it’s going to be on the election and talking about the thing that most people are really concerned about is, well, What, if so-and-so wins? What if Biden wins? What if Trump wins? I’m not going to be covering what if Trump wins, because the reality of it is he’s a known entity. We’ve had him for four years.
We know kind of what he’s about and what he stands for. Most people are worried about what if Biden wins? What if we lose the Senate, blah, blah, blah. So I’m going to be talking about that very topic and using history to cover that. So make sure you check out that this Thursday at noon. And the way you sign up is paulwinkler.com/webinar. Okay, one of the things that I have a tendency to talk about every so often, some people get really, really fired up about conversions of retirement accounts and Roth conversions.
The tax system
I see you’ve just got to be careful. Now I’m very much in favor, many times of doing conversions to Roth IRAs for a lot of people, but I have to, I’m always very conscious of something and that is our tax system doesn’t remain stagnant. We don’t always do things right the same way from one administration to another. Now, if we look back at the history of our tax rates in this country, we’ve been anywhere from like about a 92% marginal tax rate, top tax rate, to 62%.
You know, I think about what Kennedy lowered them to is in the low sixties and then Reagan lowered the top tax rate down to 28%. And then it got bumped back up with Clinton and a couple of bumps up. And then we had a bump up with Obama. So, you have the top marginal rate changing constantly. And you’ve just got to think about what’s likely or what could happen or how does the government think about tax policy?
So one of the things that I talk about is, well, what if our tax laws change completely? And we changed the way we do stuff and what if we go to a different type of a scenario and that’s exactly what this clip I want to play for you right now talks about.
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A national sales tax
Ira Work: Okay, so the follow up bill, we know the taxes to your point, then probably we’ll need to go up to pay for this. But income tax hikes are very hard to sell. Politically. Let’s be clear, the folks who are in charge now, aren’t going to be in charge in twenty years. Most of them are in their sixties and seventies already. So do you foresee the possibility of a national sales tax, a VAT like Europe as a way to get the bill paid and lots of people for many, many years, as you know, kick that around as a real solution to our problems and doesn’t seem to ever get real tracks at some point. I think some version of that should be seriously considered now, how do we seriously consider policy issues anymore in the way we’re so divided in our politics?
But I think it has to be on the table over time, based upon what you were going through and the need for some change. I absolutely believe the South issue is off the table. And as you put out a 10-year period, if we can come to some resolution of our long term fiscal issues, at some point in that, especially in that period, then the future is not very bright for a lot of our grandkids and their kids, right?
Paul Winkler: So it very well may be that we end up in a situation where this does end up on the table. Now, what would that mean from a planning standpoint? Well, it very well could mean that income tax rates, how is it going to be sold, reduce the income tax rate, and then we’re going to replace it with a national sales tax. Why? Well, how many of you have had somebody that’s come over your house? That’s in the trade, maybe they’re construction, maybe they do lawn care, maybe they do whatever.
And they say, Hey, just make the checkout payable to me. Or can you just give me cash? You give me cash, I’ll give you a discount on the work. And the reality of it is there are a lot of people that are working off the grid in America, and they’re not paying income taxes, but they’re not paying social security taxes either. And you could make a good case that maybe what we do is we say it’s a national sales tax. So no matter where you go to buy anything, you’re going to pay a tax to buy that item.
And it’s going to be a lot higher than what we have right now, but it will be in lieu of the income tax that you were paying before. And that way we take people off the grid and we bring them all on the grid and they could make a case that this is a much fairer way of doing things. They can, because I think of some people that I know that actually have multiple retail stores and they don’t actually deposit all the cash they bring in. So that’s a very good case.
The problem that I do see with it, as you take a family of four, you know, when you know family is making $200,000 a year and family B is making $70,000 a year. And for the basic necessities, I mean for food and clothing, you know, they’re probably going to eat about the same amount of food. I mean, a family of four is you’re gonna eat about the same thing. So does it then become a little bit more of a tax on the people that is, it is regressive. That’s why you retain that the income tax to some extent, but typically the only upper income people pay the income tax.
That’s probably, that’s my guess. I don’t know. I don’t know how that would work out. I mean, I don’t have a problem with it. I’ve seen it in Europe. It’s everywhere else. But, and the reality is they can actually hide what the taxes are. Give you an example: when my wife and I were in Spain, I went into a store and I bought two shirts and the shirts were 39 euros each and the girl says it’ll be 78 euros.
And I’m like, okay, gave her 78 euros, went back to the hotel. I tried them on a one of them. I really didn’t care for how it fit. So the next day I went and brought it back. And the receipt that she gave me for the reimbursement of my 39 euros showed that the actual shirt was 21 euros and 17 euros in taxes. Yeah. Yeah. That’s a lot of tax. So you can actually hide how much tax.
You think about the gas. I mean, when we talk about going to the gas pumps and buying gas, how much is the actual gas cost? Well, it’s a fraction of what the actual gas cost is a fraction of what you actually pay, because so much of what you pay is taxes.
Jim Wood: And that’s what always scared me about this idea is that they can present it and say, well, we’re going to put on this new, you know, VAT tax or consumption tax. And, but we’re going to keep income taxes low, or maybe even going to lower them. And so that all sounds really good. But once that tax is there, it’s really easy to, Oh, it’s just another quarter percent. We’re just going to tweak it up a quarter percent cause we need a little revenue. And it’s easy to ratchet it up. Not likely that they ratchet it down. But this has definitely come into a lot of planning conversations because people think, Hey, should I save money in my traditional IRA? Or should I say money in my Roth IRA?
And this is very much a conversation we’ve been having for years in terms of this type of possibility and the fact that, Hey, all of a sudden, they’re just talking about a little more, nobody knows what tax rates are going to be, which makes it very, very hard to plan. So you just kind of have to take, well, the best possible assumptions of everything, depending on somebody’s income and all that, but it could really change the landscape.
Paul Winkler: And that’s why I want to bring it up because so often what I’ve heard in other planning circles and other shows and people talking about this, all taxes have got nowhere to go up, but up, they’re going to go up 10%, income taxes are going to go up, and I’m like, Not so fast. It may be something different. Congress is pretty doggone creative. If they’re nothing else. It’s like, we know we’ll never know what they’re going to do. Right. We just never know. And that’s why we just don’t know. Yeah. You diversify.
Yeah. You think a little bit about like the government does and you do tax diversification, so you might have some pre-tax stuff. You might have some post-tax stuff, but watch it when you go all one way, and I’ve seen people do that. Yeah. They’re going to go no place but up, you need to convert everything you can right now to Roth IRAs. And I’ve seen that kind of conversation around there and you gotta be really, really careful and think about, you know, how can they sneak it in? And I think that that guy right there, he’s a fed official. I think it was who was talking. So it’s not just some kind of guy that just fell off a turnip truck. He knows tax tax policy.
All right. That’s it for the Investor Coaching Show today. Hope you enjoyed it with my friend Ira Work and Jim Wood. I am Paul Winkler.
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