Deficits, Taxes and Savings

As a CPA who works with clients to help them plan their financial futures, I am troubled by President Bush’s $2.4 trillion budget proposal and its projected deficit of $364 billion for fiscal year 2005. Common sense would suggest that deficits of this magnitude are unsustainable and not good for our long-term economic health. It’s only a matter of time until whichever party controls the White House and Congress will be forced to take more drastic steps to address the deficit problem. Only through a combination of spending cuts and tax increases will the deficit problem actually be solved.

If past trends continue, the government’s efforts to reduce the deficit will lean far more heavily on tax increases than on spending cuts. Already a “stealth” tax increase—the alternative minimum tax or AMT—is ensnaring more and more middle-income Americans. If Congress does nothing to index for inflation the income level subject to the AMT, even more Americans will be forced to pay it, which originally was intended to tax only the wealthiest taxpayers. Unfortunately, even this unintended AMT “windfall” would not be enough to generate the needed revenue to balance the federal budget. Congress would then have to raise regular income tax rates and close many of the legal “loopholes” to truly solve the problem. In a worse-case scenario, Americans might lose many tax-advantaged savings incentives—IRAs, 401(k)s—and face higher tax rates. I believe it is part of our responsibility as CPAs to encourage clients to make better use of the tax-advantaged savings and investment tools allowable under current tax law. Only by saving and investing, rather than spending, will ordinary Americans be prepared to face the tough times that appear to lie ahead.

J. Peter Doyle, CPA/PFS, CFP
Fox River Grove, Illinois