Dear Friends,
As you probably know, President Biden has proposed numerous spending programs that would cost almost $2T. A large stimulus package carries several knock-on-effects, including the need to eventually raise taxes. In addition, so much spending could also increase inflation. To meet the spending needs, tax revenue would need to be generated.
The almost $2 Trillion economic support package will undoubtedly add to the U.S. budget deficit and increase the debt-to-GDP ratio. Goldman Sachs is projecting a 20% to 30% increase in the debt-to-GDP ratio from 2019 to the end of 2021, eventually reaching 120%-130% by 2030. (This is the largest debt-to- GDP ratio since 1945.)
However, some argue that this enormous level of debt is not necessarily so damaging. According to Goldman Sachs, interest expense as a percent of GDP has been declining steadily and the number is projected to be around 1.3% (and then down to 1.2% by 2023). The debt payments are very low because interest rates are so low (and therefore the interest expense burden is similar to what it was in the 1960s).
Goldman also noted that there is evidence that Washington can deal with a growing debt trajectory before it reaches a tipping point, referencing the Budget Control Act of 2011 (which raised the debt ceiling but cut spending), and the American Taxpayer Relief Act and Budget Control Act of 2012 (which raised income taxes on individuals earning more than $400,000 (and couples above $450,000) but made permanent previous tax cuts for those earning less than those thresholds). We do expect tax increases at the end of the year.
As a result, the Biden Tax plan currently looks to raise taxes by $3.5T over a period of several years. If you have a large IRA, you have even more to worry about with the high taxes and the SECURE Act. Passed in December of 2019, the SECURE ACT requires non-spouse beneficiaries to deplete Inherited IRA accounts (inherited after December 31, 2019) within 10 years after the initial account owner’s passing. For those beneficiaries, the required distributions are taxed at the beneficiary’s ordinary income tax rate. Depending on the value of the IRA, this can create large tax burdens on non-spouse beneficiaries (such as your children), who are normally already in their prime earning years (40-60 years old).
Although there are many cross-currents, we are monitoring (and anticipating) these events very closely, and making portfolio changes in real-time; with the goal of presenting (and growing) your assets. If you have questions, please reach out to us to discuss whatever is on your mind.
Debbie
https://www.thinkadvisor.com/2021/02/08/goldman-4-reasons-to-overweight-u-s-stocks-downplay-inflation-worries/#:~:text=%E2%80%9CInterest%20expense%20as%20a%20percent,by%202023%2C%E2%80%9D%20she%20said.