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A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
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Hello there. Welcome to The Power of Zero show. This is your host, David McKnight. Thank you for joining us for another week of The Power of Zero-knowledge and hopefully, enlightenment. I am the best-selling author of The Power of Zero, Look Before You LIRP, and don't forget about The Volatility Shield, my most recent release, came out a few months ago. I've gotten a lot of great feedback on that. Please follow me on Twitter if you have a chance at @mcknightandco. Of course, you can watch our movie, The Power of Zero: The Tax Train Is Coming, pretty much anywhere you stream movies. You can also get our books in bulk at powerofzero.com/Books.
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I'm excited about today's topic. Today's topic actually gets and has been provoked by a number of emails that I get, sometimes even emails that are quite argumentative in the common parlance of today from what we would call haters. People that say, “Hey, Dave, you have been wrong for 10 years about tax rates going up. You've been preaching for 10 years that tax rates are going up and all tax rates have done is go down. The central thesis, the central proposition of the whole Power of Zero paradigm is flawed because you, Ed Slott, and all these other people have been claiming that tax rates are going to go up, yet they've done nothing but go in the opposite direction.”
0:01:57
The question becomes, the Tax Cuts and Jobs Act of 2017, does that delegitimize everything that we've been saying for all these years? Does it delegitimize, for example, David Walker's op-ed that he wrote on CNN famously eight, nine years ago, in which he proposed that tax rates would have to double just to keep our country solvent? Here's my question for you: Did anything happen between now and 2018 when the Tax Cuts went into effect that would nullify the central proposition, the central thesis in David Walker's op-ed? I would submit to you that not only has nothing nullified them but the problem since then has only compounded.
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Remember that when David Walker came out with IOUSA back in 2009, I believe, the national debt was only $10 trillion, and here we are $12 trillion later, we're at $22 trillion, $23 trillion and people are still asking me the question, do I really believe that tax rates are going to go up just because tax rates went down? Here's my question for you: Is the federal government prone to making bad financial decisions? In other words, is it possible that the federal government could have made a decision that was not ultimately in the best interest of our country that may have snowballed the problem, that may have prevented them from confronting the reality of their fiscal condition, and simply kicked the can further down the road so that the fix on the back end will be all the more severe and all the more draconian?
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When I interviewed David Walker in his home in Connecticut when he was running for governor, this would have been back in 2018, he said, “Look, we got the desert before we ate our spinach.” What did he mean by that? Basically, we say the same, “Look, anytime you have tax cuts, they should be accompanied by a commensurate cut in expenses.” If economists, David Walker, others, have always said that we should be increasing revenue and decreasing spending, yet what we did at the end of 2017, going into full force in 2018, was we decreased revenue and increased expenses, what do I mean by increased expenses? The Congressional Budget Office said that the cost of the tax cuts, a lot of people say when you do tax cuts, you can grow your way out of it, all of the additional productivity and stimulus that comes about because of the tax cuts will pay for the tax cuts.
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The Republican administration of the Republican Congressional Budget Office did not agree with that assessment. They basically said it was going to cost $1.5 trillion over the next 10 years in order to pay for those tax cuts. In other words, there wasn’t going to be enough productivity or enough stimulation from the economy that would pay for the reduction in revenue. By the way, notice what's happened to the deficit, by the way, people get deficit and debt on the national deficit, the national debt mixed up all the time. The national debt is how much we owe tolls, that would be the $23 trillion number. The national deficit, the budget deficit is what we spend more than what we bring in each and every year.
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All that's happened since the tax cuts went into place is that the national deficit, what we're spending above and beyond our means, has simply just gone up. Remember what Tom McClintock said at his interview on our movie, “When we get to the point where we have trillion-dollar deficits, that is a harbinger, that is a canary in the coal mine, if you will, for a sovereign debt crisis,” meaning, countries will stop loaning us money because they don't believe that we can afford to pay the money back. Like I said, we've compounded the problem, we've kicked the can further down the road, and we've made the reality of future tax hikes all the more real and all the more inevitable.
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If you can think back to the interview, Noah Rothman is one of my favorite people in our movie, I actually proposed to him the question—by the way, he's the editor of Commentary magazine which is a conservative magazine in New York. He's a fiscal conservative—I said, “What happens if we just keep kicking the can down the road? What happens if we don't increase revenue and cut spending?” He said that tropically, we get to a crisis point. We get to the point where in order to be able to pay basic services like Social Security, Medicare, and Medicaid, we will have to have a dramatic and immediate increase in taxes. Now, you have to look at the history of the federal government—and I tell this story all the time to illustrate my point—if you guys remember the debt cliff that we experienced a couple of years ago, where basically, in order to be able to pay the interest on all of our debt, we had to basically increase revenue.
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The government had to have a meeting of the minds on what they were going to cut in order to be able to raise the debt ceiling. They had this meeting in Congress, and I remember looking specifically at CNN, I believe, and in the upper left-hand corner of the screen, there was a little timer, if I remember it correctly, it said something to the effect of the US defaults on its debt in 29 minutes. What does that tell you? That tells you that the federal government has a history of kicking the can down the road, waiting until the eleventh hour to be able to solve these financial problems. They do things like decreasing taxes and increasing spending in the short term that only compounds the problem and makes the fix when we get to that 11th hour all the more severe, all the more extreme, all the more draconian.
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Here's the bottom line, just because the federal government behaves irresponsibly doesn't mean that the math to which David Walker, and a host of other economists, constantly referred to doesn't add up, it simply means that the problem is going to continue to snowball until the people in Congress have the moral fortitude and willpower to do the right thing which involves either raising taxes dramatically, reducing spending, or some combination of the two. Here's the problem, the more time wears on, the more reducing spending loses its effectiveness. Why? Because we are financing all of our spendings with debt and we are going to get to the point where the interest on all that debt consumes such a large part of our budget that we won't be able to pay the benefits for Social Security and Medicare without raising taxes.
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Let me repeat that. This is an important point here, the more time wears on where we fail to reduce spending than actually reducing spending loses its effectiveness. Why? Because we are financing our spending with debt. There will come a time where the interest on that debt is so prohibitive like George Shultz said in our movie, it's so prohibitive that it crowds all of the other expenses out of the budget. In short, has the central thesis of The Power of Zero been disproven by a reduction in taxes? The answer is, of course, no. It actually makes the central thesis of The Power of Zero paradigm all the more real. When Congress gets around to fixing this problem, then the increase in taxes is going to be even greater than it would have been had they done the right thing from the very start.
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The next time somebody says, hey, tax rates are going up, in fact, they're going down, they're going the other direction, that proves everything that you believe to be wrong. Remember that there will come a day of reckoning and every day that goes by where the federal government fails to reduce spending means the reality of higher taxes down the road is all the more real.
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That's the show for today. Thanks for being with us. Again, I’m the best-selling author of The Power of Zero, Look Before You LIRP, and The Volatility Shield, all of which can be purchased in bulk at powerofzero.com/Books. Don't forget to follow me on Twitter at @mcknightandco. Feel free to watch our movie The Power of Zero: The Tax Train Is Coming anywhere you screen movies. Of course, please, subscribe to our podcast. I would really appreciate it and put a review down if you can as well, that really, really does help. Thanks for being on the show. We'll talk to you next week.
