Tom Sedoric and Casey Snyder

What might you respond to an advisor who emphatically tells you that taxes will, without a doubt, increase in the future? Would you thank them for being a wise fiduciary and for thinking proactively to help you prepare for a future of potential economic and tax volatility? Or, would you chide them for being so pessimistic and encourage them to improve their outlook and attitude?

It won’t matter if you thank or berate because if you don’t prepare there will always be consequences. We are not alone in believing that too many Americans are either misinformed or lack an elemental understanding about current tax structure. Do you recall the $1.9 trillion Tax Cuts and Jobs Act of 2017? Most Americans do remember, which is not surprising because it is impacting their 2018 tax returns and refunds.

Knowing about the tax laws and understanding the basics are not the same. A 2018 survey of 2,000 Americans by NerdWallet/Harris Poll found that 26 percent didn’t know there was a new tax law and 51 percent didn’t know that income tax brackets had changed. Another 2018 survey confirmed the following information gulf: GOBankingRates tested 501 Americans in a simple, 4-question survey about key fundamentals of the new tax law. The result: 77 percent failed the test on questions such as the amount of the new standard deduction ($12,000 for single filers, $24,000 for joint filers), how many tax brackets there are (7), and what is the highest tax bracket (37 percent).

Our point isn’t to castigate our readers for not understanding the dense and complex tax code. The tax code is purposefully complex and dense. Professionals work hard to keep up with changing laws and it’s not easy to do with the array of conflicting rules and regulations. What we do know is that it is critical to understand the basics and the impact on your taxes and tax planning now. It’s equally important to take a macroeconomic view and calculate how the law – and future reactions to it – might keep you “ahead of the curve”. Taxes are, and will remain, an individual’s single largest lifetime expense.

The new tax law is over one year old and some trends are coming into focus. For example, a few days before the government shutdown ended in February, the Treasury Department released a report saying that tax revenues declined 0.4 percent in 2018. This drop came despite strong economic growth and the lowest unemployment rate in decades. This drop in tax revenues helped push the U. S. budget deficit in 2018 to $873 billion, an increase of 28.2 percent from 2017. The budget deficit could reach $900 billion in 2019. The Congressional Budget Office said in January that annual budget deficits will top $1 trillion starting in 2022. The decline in tax revenues is easily explained. In addition to lowering rates for top individual earners, the 2017 Tax Act cut corporate tax rates from 35 percent to 21 percent. Proponents of the law said it would boost job and wage growth, and hence tax revenues, but these increases have been modest. According to an April 2018 report by the research and ETF firm TrimTabs, corporations spent $305 billion in the first quarter of 2018 on share buybacks and cash buybacks and cash mergers and $131 billion on wage growth.

A February story in the Washington Post on research work at Duke University and Grinnell College highlighted another trend from the December 2017 Tax Act. According to the researchers, a $300 billion business tax break to allow for immediate equipment depreciation (rather than over a six-year period) led to minimal wage growth as more companies accelerated existing trends by acquiring automation to replace workers.

The decrease in tax revenues combined with increased federal spending has driven the national debt up $2 trillion under the current Administration - to almost $22 trillion. That figure has risen from $5.77 trillion in 2001 when President George W. Bush was President, presiding over two wars, major tax cuts, and major programs like Medicare Part D. Under President Obama, the debt increased from $11.5 trillion to $19.85 trillion.

Most of these “headlines” came within a two-day period and big numbers often make folks “glaze over”. At some point, all debts and deficits must be paid - that is what tax revenues are for.

We pay close attention to the numbers because tax revenues, combined with other micro and macro economic factors, impact current and future financial and tax planning decisions. In Part 2 of this tax discussion, we will make informed estimates about future headlines and their implications for investors.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory LLC and The Sedoric Group maintain a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory LLC. 2985754