Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.
Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [00:26.1]
Brad: Welcome to Make your Money Matter, the show dedicated to helping you create a better relationship with your money. I'm your host, Brad Barrett, and it's my goal to help you distill the best ideas when it comes to your finances so you can make more confident money moves. Here at One Capital Management, our mission is simple to help our clients and you listeners take control of your finances and build the life you deserve. Friends, today the challenge is no longer the access to information, but rather it's finding the right information, and more importantly, how that applies to you. And that's my commitment to you here today on the Make your Money Matter podcast, because after all your money matters and knowing how to plan your financial future is vital to your financial success. I want to thank each of you here, who listened to the podcast each week. And if you haven't already done so you can go to our website at onecapitalmanagement.com. You can click on the media tab and there you can download and subscribe to Make your Money Matter podcast. You can also download and subscribe the podcast on any platform where you would otherwise download and listen to a podcast, whether that's Spotify, SoundCloud, Google podcasts, or the apple app on your phone. And again, leave us a comment, leave us a review, let us know how we're doing. It's always good to get feedback. And if you like the show, tell someone you like, if you don't like to show, I guess tell someone you don't like, but share it because I think today's topic as we get into what not to sweat, when it comes to Biden's tax hikes is probably pertinent. [01:58.8]
A lot of us are seeing the economy opening back up right now. We're curious as to what that's going to look like. A lot of discussions have kicked off around inflation and ultimately in the same time period, we have a new president. So, let's talk about that. And in doing so, I want to start off with the topic of bears, what? Yup. I said it bears. And here's why. So contrary to popular belief and frankly many children's stories I've read to my kids, bears they don't go into a deep slumber each winter. Grizzlies and black bears in particular, and for example, enter into what's called torpor. It's where the body temperatures are lowered and heart breathing and metabolic rates slowed allowing the conservation of energy. So, they may wake stir or stretch around and even wander out, especially if they sense danger in their den or the den is flooded. [02:53.2]
Now in topor, or again, what it's called light hibernation bears were able to live stored fat. Inside their caves are these clawed dug dens that they've built and avoid the harsh elements and lack of food. Now, in essence, the bears are largely staying inside and trying to survive until sunny days arrive, sound familiar. Exactly what most of us have been doing since COVID hit North America and frankly all around the world. Now I should say one envious difference is bears lose weight, but very little muscle during their largely sedentary period. I don't know about you didn't happen to me. So, when bears finally started to emerge the enter to a phase called walking hibernation. They don't immediately become a voracious beast, but rather the eaten bits and drabs while allowing their bodies to adjust. This feels to me a bit like the early part of this year, 2021, when many of us cautiously re-entered society as vaccines slowly begin to roll out and the pandemic curbed. So, when a “walking hibernation” ends, the bears are ready for normal behavior. Feel familiar? Which, and now stay with me here, okay. Brings us to inflation, which is the rising costs of goods and services. [04:16.7]
Currently gas prices, depending on where you live are up 15 to 23% Rental cars, their costs have skyrocketed an astronomical 293%. This is according to latest federal reserve monthly stats. Now use cars are up nearly 80% Beef, milk and beer, they all rose 32, 30 and 13% respectively. Why? Because we're a massive ravenous bears anxious to consume the pleasures denied to us by lockdowns and shutdowns, right? And for the time being, there are only so many seats on a plane. There's so many seats in a concert hall. There are only so many seats in a restaurant still. Same thing to be said about cars are only are certain amount available cars to rent or purchase and same for the houses on the market. So big part of the problem is that months upon months of laid off workers shut down factories and canceled orders have all caused massive bottlenecks in supply chains. [05:18.7]
Understandably, perhaps most industries weren't in a position to suddenly meet the sharp demand of a quickly reopening economy. Now you add to this, the artificially tight labor markets, which is pushing up wages and leading to more disposable income for these said goods and services. So, compound that again with government basically dispensing trillions in unemployment benefits and infrastructure spending and attempting to elevate employment and wages, even further. The result you might ask annual inflation levels above 4% for the first time, since the USSR dissolved and Arnold Schwartzenegger our old governor and here in California made his famous quote, “Asta Lavista, baby,” which is a ubiquitous catchphrase, I might add. This is by the way, 30 years ago, if you can believe it. So, our ending hibernation and emerging into this barren marketplace is lightening our wallets. Yes, it's a difficult phase. The good news is it's just that, it's a phase. Soon enough, the landscape will be bountiful again as federal reserve chair, Jerome Powell told Congress in late June, just a few weeks ago, the current price gains are largely due to those afore mentioned bottlenecks, which are temporary. Now, the chairman pointed to used cars, airplane tickets, and hotel rooms, which make up a huge part of the gains as industries again, they were caught off guard essentially by skyrocketing demand from a rapidly opening economy. [06:52.8]
Now the vehicle sector provides a really good look at the chairman's point. During the pandemic fears over public transportation, cause an increased demand for new cars. Now that combined with the shortage of the microchips needed to manufacture those cars, drove folks over to the used car market. So, who else is bidding in this market might you ask? Rental car companies, many of which sold their fleets at the beginning of the pandemic and suddenly need to meet this furious demand. You don't need a degree in econ to know how that's going to play out. Now, Chairman Powell went on to say those things that, “we would look to, to stop going up and ultimately to start to decline as the situations resolve themselves. He went on to say they don't speak to a broadly tight economy. The kind of things that has led to high inflation over time.”. Now he added that these effects have been larger and may last a little longer than the fed expected, but, and he goes on to say, “the incoming data are very much consistent with the view that these factors will wane over time and inflation will then move down towards our goal.” That goal as a central bank being around 2%. So, we're in the camp here at One Capital Management and myself, as well as an advisor here at One Capital Management. We're in the camp of believers that the higher-than-expected inflation will indeed last longer than the central banks are predicting, we do feel that. Also, that there should be really no fear of this leading to a recession. [08:27.7]
There's no comparison that we see as some have definitely made. And you might be thinking is listening to this to say the late seventies or early eighties, when a global oil crisis had the whole economy reeling and you know, economists thought higher inflation could grow employment number for any econ majors out there, the Phillips curve. So, for almost 20 years, inflation has run right around 2%, the stated goal of North American central banks. So, with a little bit of time, we feel we'll start heading there. Global economies are really they're opening exponentially and there's a palpable demand, I think we all can see it for normal behavior. The temporary, this current temporary rise in inflation won't necessarily derail growth. Interest rates, they may move a bit higher, but even if they doubled, which is a hit to long-term bond investors, the 10-year government bond yields in the U.S would still be right around 3%, pretty awfully cheap by historic standards and just slightly above inflation, which is ideal. [09:30.1]
So, these current price hikes are not a reason for panic. They're an indication, the economy is healing and on the cost of being able to fuel even more expansion to meet the demands of a growing world. Something we're going to talk about because as this is all happening, we also have a new president who is pushing an agenda, many agendas I might add, but one agenda that's hitting a lot of people outside of the political realm of society is the tax hikes. So come fall, which believe it or not is right around the corner bears back to my bears in preparation for the winter, we'll enter into hyperphagia, which is a stage of massive consumption. Sound familiar? Now with supply chain, in our opinion, with the supply chain kinks being worked out, production ramping up and inflation trending downward, the global economy will likely be in the same stage. So, as we head into a conversation about potential tax hikes, it's important to note some of the other topics that have been discussed around, especially our central bank and some of these things that are playing into the same dialogue of infrastructure spending, tax hikes, as well as how that relates to the economy as a whole. [10:45.1]
So, if you recall, I titled this episode, this week of the, Make your Money Matter podcast, why not to sweat Biden's tax hikes. And it came from an article I was reading in Kiplinger's most recent personal finance magazine. It was actually written by a guy named Rocky Mangle. And I thought it was perfect until the three things that I think are important for him just to look at when considering whether or not we should be sweating Biden's tax hikes. So, a couple of things when we talk about the tax likes, what does that mean exactly? So, president Biden is titling his tax hikes or social infrastructure program as the American family’s plan. Now this plan, which again, lists a whole bunch of social infrastructure programs as well, everything from free preschool and community college to caps on childcare expenses, there's training and pay for childcare workers, shoot there's guaranteed family and medical leave, enhanced unemployment benefits and tax breaks for lower- and middle-income families. [11:43.0]
Now to pay for them is $1.8 trillion package Biden didn't wants to raise taxes on upper income Americans. Now, as you can imagine why I'm talking about it this week, that's setting off alarms for a lot of people. Now, in addition to the anxiety over their own personal finances, many Americans are worried about the impact on the U.S economy as a whole, which is why I started this week's episode when it comes to inflation. One of the main anxiety driven things when you talk about a central bank, that's been pumping the economy full of money, and you have a president who's talking about a big spend of another $1.8 trillion. But if you're looking for ways to bring your anxiety level down, that's why I wanted to bring this up on maybe three reasons why you wouldn't want to, or shouldn't maybe sweat the Biden tax increases. [12:30.5]
Number one, you may not be rich. I know it sounds like a crazy statement to make, but just hear me out. Okay, for many of our clients listening here, as you know, we tailor each of our plans to your income, to your cash outflow needs, your overall investment goals. And we have income in our client base that varies widely sometimes and for different reasons. There's some that are high net worth earners that just show very little income in that year because maybe they sold a business and they're currently in position to look for either another business to buy or start up. So, there's many different reasons as to why clients may be in a higher income bracket one year and a lower income bracket and another year. But why I'm stating that as the first bullet point here is while some people who maybe aren't particularly wealthy in a single calendar year from an income perspective, they could potentially get caught up in some of the proposed tax increases, but that would certainly be the exception rather than the rule. So, the revenue raisers are clearly aimed at the country's highest earners and that's who ended up with a bigger tax bill in the vast majority of cases. [13:36.6]
Now, for example, the proposal to increase the top income tax rate from 37% to 39.6% reportedly would apply only to those who are single filers with taxable income over 452,700, and then married couples, those of us that are married with taxable income over 509,300. Now, if the highest capital gains tax rate goes from 20% to 39.6%, it would impact only households earning $1 million or more. The plan to eliminate the step-up basis, right, which has been talked about as well as a concern for inherited property would also only apply to the gains of at least $1 million. So, number one reason why you may not need to sweat the Biden tax hikes is we may not be in those income tax brackets, where it would affect you. If you are, let's go into number two. So, if I'm wrong about number one, or if it doesn't apply to you a number one and you are in that higher earned income period where these tax hikes would affect you, number two is the increases are an imminent. So even if you're wealthy enough to be affected by the proposed tax increases, we, and I should say myself included here, don't expect them to take effect until 2022 at the earliest. [14:55.5]
So, while Biden hasn’t said when he wants the proposed tax increases to take an effect, there's no indication that they will be applied retroactively to the 2021 tax year. Now, if the economy doesn't fully recover soon as an example, any tax increases could be pushed even further down the road. I mean, raising taxes in the installed economy is risky, even for Biden. So, for him seeing an economy that may not be doing what he wants it to be doing, or what we as Americans want to see it doing. For him to raise taxes and for it to pass maybe a much harder route than he thinks. Which leads me into the number three reason why we probably don't need to sweat the Biden tax hikes. And that's the third one being Congress may block them. Thank you to all of our founding fathers for how we set up our country. It's beautiful, it's organized. It has checks and balances. It's tough hiking taxes on anyone, much harder, believe it or not than raising taxes on corporation. [15:54.1]
And there's certainly a chance that president Biden won't get the tax hike he's proposing, or they could be cut down from where they currently stand right now. Congress could also, to my point also come up with a whole new slate of tax increases that don't affect you at all. Or they could just sell the entire plan. Republicans in particular, aren't going to support tax sites at all, we know that and the Democrats will have to go it alone, probably using the “budget reconciliation process.” That means they'll need all 50 Democrats in that process. All 50 democratic senators to pass tax legislation. If just one box, then the whole plan could collapse. [16:34.5]
So, number one, it may not affect you based on your income. Number two, if I'm wrong on number one increases are imminent. And number three, Congress may block them. Thank you again to the checks and balances of how we are set up as a democracy. So, we're looking at some of these conversations and by the way, this has a lot to do with some of the conversations that I've had on this program that I've talked about through some of our different episodes around communication and how words play a lot into it. Because nowadays we're in an information overload. And disseminating how that information relates to your own personal planning, takes the careful and thoughtful nature of someone working with you, which is why I always advocate to have an advisor helping you through these times, especially as you're preparing your investment portfolio and ultimately into your retirement plan. So before reacting or getting your anxiety levels up and your blood pressure up, when you see things coming through and how it's going to affect you, take a look underneath it sometimes. [17:33.7]
So, I wanted to write this episode this week referenced the Kiplinger article I was reading, which I thought was beautifully laid out and hit the three points that I was really talking about with most of our clients here, which is it may not affect you in the first place, if it does, and I'm wrong in that one, then the increases aren't imminent. And number three, Congress may block them as a whole. Now planning comes into a lot of this because I've always been of the belief we do, we want to plan for what we know now, what we may think might happen. Now, getting ahead of it and being proactive is important. So, there's a lot of strategies that we can put into place for those that they know these plans, if or when they get enacted will affect them. There's a lot of planning we can do ahead of time. [18:11.5]
So, if you haven't already done so you can always reach out to us here at One Capital Management, you can go to our website at onecapitalmanagement.com or you can give us a call at (805) 409-8150. But find that trusted advisor to help navigate some of these tough decisions and tough discussions that we're having nowadays, because of all the information that's coming out of either DC or the central bank, because they're all happening as we speak and as we're entering into an opening economy. We are all bears coming out of hibernation. Has they mentioned at the top of the show. So, as we see this pick back up, lot of things to consider as you're building your investment plan. So, finding that good counsel, that good advisor is a really vital point to make, as you look at navigating a lot of the information that's coming at you, especially when it comes to your investments and your retirement. [18:55.1]
Thank you for listening to the, make your money matter podcast, if you haven't already done. So again, you can go to our website at onecapitalmanagement.com, there you can download and subscribe the podcast. You can also download it on any platform where you would otherwise download a podcast, whether that's Spotify, SoundCloud, Google podcasts, or the apple app on your phone, again, leave us a review, let us know how we're doing. And as always before acting on anything discussed today, make sure to reach out to your financial advisor, to go through your specific situation. And again, if you need our help or would like to seek our advice, you can give us a call at (805) 409-8150. You can also go to our website at onecapitalmanagement.com and set a time with myself or any one of our credentialed and fiduciary advisors here at One Capital Management. [19:41.0]
Next week on the Make your Money Matter podcast, we're gonna be talking about Tennessee Williams, the famous playwright, and how that actually relates to your investment and retirement planning. Curious? Then tune in next week to the, Make your Money Matter podcast, and remember always make your money matters! [19:57.3]
The information in this podcast is educational and general in nature and does not take into consideration the listener's personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [20:20.9]
