(Note to Readers of Gregory Bresiger.com: The philosophy of this blog is the idea of smart money management; of avoiding many of the mistakes that can ruin a person’s life. We have taken this idea and turned it into a mini-book that combines commonsense with simple money management concepts. Liam Judge, my partner and the person who is the defacto electronic publisher, and I have written a book that incorporates this philosophy, MoneySense. Here is a chapter from the book about how the U.S. economy may change under the Trump administration. If you like it and want more, perhaps you will go to go here >> http://amzn.to/2ilFI5p to purchase the eBook on Amazon. There, for the marginal price of $2.99, you might be interested in reading the rest of the book, which offers advice on various different financial topics such as Investing and Retirement Planning. We thank our readers, people who allow GregoryBresiger.com, to survive)
The basic ideas of the MoneySense investor—-be a transactor, not a revolver, save and invest on a regular basis over years to achieve financial independence—don’t change with the new Trump administration. These guiding ideas apply to almost any administration here or in almost any Western Europe nation. However, if the Trump administration follows through with its economic proposals and if most of them are enacted into law, then there will be increasing opportunities for the MoneySense investor over the next few years. It is important that the investor is ready to act quickly. That’s because these opportunities might not come again for decades.
But remember all these changes are also dependent on if Congress—now narrowly under the control of Trump’s party although Trump often goes off on his own and ignores his party—goes along with President Trump’s plans in the first two years of his government. So the new administration has a small period to accomplish a lot. Indeed, Congress could begin changing as soon as the beginning of 2019. They are also dependent on changes in public opinion. In this electronic age, public opinion can change in a flash.
These plans are also affected by whether President Trump is actually serious about what he said he was going to do when he was on the campaign trail. Trump, the candidate, was known to change his mind frequently. However, the general tone of his campaign was generally in favor of lower taxes.
Republican presidential candidate Donald Trump’s tax plan would significantly reduce income taxes and corporate taxes, as well as eliminating the estate tax, according to the Tax Foundation.
“The plan would reduce federal revenue by between $4.4 trillion and $5.9 trillion on a static basis. The plan would also significantly reduce marginal rates and the cost of capital, which would lead to higher long-run levels of GDP, wages, and full-time equivalent jobs. After accounting for the larger economy and the broader tax base, the plan would reduce revenues by between $2.6 trillion and $3.9 trillion after accounting for the larger economy,” the Tax Foundation says.
These tax cuts could be a boon for those starting out with little or nothing but committed to a long term saving and investing plan. These people need help starting out. The cuts could also help those in the midst of a financial independence plan and hoping to speed it up.
Nevertheless, if these opportunities for more saving and investing happen, the MoneySense investor should certainly take advantage of them. That’s because they could help him or her achieve goals sooner. Let us discuss them and what you should do about them.
Candidate Donald Trump said that he wanted big cuts in corporate, personal and investment taxes. These are all things that, if they become law, could help those who are already committed to the principles of MoneySense. They could help them save and invest more. That’s because, in principle, they would leave most people with more money in their pockets. But these cuts will only happen if Trump’s ideas become law. These include lowering capital gains taxes and other investment taxes as well as the income taxes one pays each week or quarter or year.
So, let us assume that his ideas, or most of them, become reality and that you are ready to act. And let us assume that the Trump administration lowers individual income taxes. As an aside, I think that, if Trump is smart, he will try to avoid the class warfare arguments that inevitably break out when someone wants to lower marginal tax rates. They go as follows: “You’re giving the gravy to those who pay the highest taxes and doing nothing for those in the lower class.”
Trump could possibly defeat these arguments by simultaneously proposing payroll taxes cuts. Payroll taxes, which finance Social Security and Medicare, tend to fall adversely on those in the lower income groups. So, a tax cut package, aimed at everyone—with both modest and high income taxpayers getting to take home more money—could be a net plus for almost everyone.
That’s because almost everyone gets to keep more of the “fruits” of their labor. They get to take home more of their hard earned income. That’s generally good for the economy—I say generally because the responsible way to reduce taxes is to cut government spending at the same time—but most importantly it can be very good for you.
What does that mean to the MoneySense investor? It means that, at least in the first years of a Trump presidency, it is likely that most people will take home more money; that less will stay with Uncle Whiskers and his ravenous legions of tax collectors. It will also likely mean that corporations, individuals and investors keep more. This could be beneficial for the average investor if he or she realizes that opportunities are available and takes advantage of them. You should look at this as a boon that might not last long. So act as soon as possible.
Where Will Your Extra Money Go?
You’re taking home more money, what should you do with it? Save or invest at least half or most of it. Especially for those who have fallen behind in retirement savings and saving for other things, take maximum advantage of these tax cuts. Don’t assume that these tax breaks will continue. It is amazing how presidents can change in office or how succeeding presidents can reverse tax policies.
For instance, President Ronald Reagan cut taxes in the 1980s. Then later on, in his administrations and in succeeding ones, taxes were raised. President Bill Clinton, despite protests from his own party, cut the capital gains rate. This benefitted the economy and millions of investors who were ready to cash in on lower rates. Some were ready to sell assets, paying a lot less in taxes when rates dropped. Unfortunately later administrations raised the capital gains rates and other taxes. So, make hay while the sun is shining. That is a rule for investors and for life. Good things rarely come around multiple times in a person’s life.
Use this temporary tax reduction period to re-enforce the MoneySense principles that we have talked about in previous pages. You have some extra, possibly unexpected, money?
Then pay off credit card debt as soon as possible. Make the commitment to be a transactor, not a revolver for the rest of your life. Then build up that cash reserve so you never fall into credit card hell again.
And, let’s say before the tax cut you were putting $300 a month into index funds. Now try to invest $500 or $600 if you can since you likely have more take home pay. If Trump goes ahead with many of his smaller tax ideas, and if he is able to get it through Congress and pass it into law, then there will likely be more investment opportunities for people who have been hurt by higher taxes.
For example, I have a middle-class friend who bought a second apartment many years ago in his co-op at a dirt-cheap insider price of $13,000. The apartment, which is now worth about $300,000, was occupied for many years and now is free to sell. However, he has had a big problem: If he sells, he will pay a huge capital gains tax, possibly as much as $50,000 of his gain will go to the government because capital gains rates are now high. After all the risks this man went through over the years of buying as well as holding on to the apartment and experiencing losses, the idea of having to kick back a large part of his gain makes him sick.
But the Trump administration wants to drop that capital gains rate. Indeed, it is considering that some middle income taxpayers could have a zero percent capital gains rate. That could help my friend and millions of others who don’t want to sell investments today because of the large tax bill. My friend would get to keep all of his gain. That could be a boon for him.
None of this is guaranteed. Still, it is very likely to happen here (And, by the way, lowering taxes in one country, could also have an effect in Western Europe, where officials in Britain, France and Germany, nations with low growth rates, could be influenced by tax cutting in the United States. The latter two nations have elections slated for this year and the United Kingdom, with a weak government long in the tooth, probably isn’t far from another general election.).
Help for Retirement?
It is also possible that the amount of money that one can put into qualified retirement accounts could be increased, although Trump hasn’t made a big deal about that. However, there are republicans in Congress, key players who the Trump administration will be bargaining with and relying on for support to get their various tax plans passed into law, that are friendly to savings incentives. Right now, Americans are allowed to put up to $5,500 a year in their IRAs ($6,500 if you are over age 50. The MoneySense investor, unless he or she is convinced that premature death is near, always puts in the maximum amount). There are also limits on how much one can put into his or her 401(k) retirement plan at work. All those limits could be raised in a Trump administration.
And, when and if these savings, investment and business incentives take place—and I think it is likely that at least some of them will take place—the MoneySense investor should jump on them. In the era of Trump, he or she should remember these basic principles.
*Don’t take the extra money and blow it in running up more credit card debt: Get rid of this card debt forever.
*Take advantage of lower capital gains rates and enjoy getting the most out of his or her gains, knowing he or she will keep more of them than before.
*Realize that lower taxes mean a greater opportunity to save and invest.
This could be the time when the MoneySense investor takes giant steps toward the goal of financial independence.