Eyes on the Prize

Almost 50 years ago, Nobel laureate Milton Friedman observed that constant changes in our tax system discourage long-term planning by households. Financial decisions based on short-term benefits often detract from a household’s long-term security. Unfortunately, Congress and our Presidential candidates have and continue to ignore this widely accepted observation.

With Election Day only four months away, the tax policy rhetoric of Senators McCain and Obama has reached a fevered pitch. Both claim to have the fairest approach to our tax system as well as having the panacea to our economic woes.

According to Roberton Williams, the former deputy assistant director for tax analysis at the Congressional Budget Office, the total tax revenue under each plan is about equal. However, the distribution of the tax burden is dramatically different. Sen. Obama’s plan offers more tax benefits to the low- and middle-income taxpayers and will increase taxes on those with higher incomes. In contrast, Sen. McCain’s plan would result in lower taxes for the average taxpayer in every income group. However, high income taxpayers would benefit more than anyone else.

Because both plans do not raise tax revenue, our national deficit will increase. This is concerning because studies have shown that deficit funded tax cuts are paid for by raising taxes in the future. Say it ain’t so!

Clearly the Election has focused a lot of attention on taxes. Combine a difficult economy, plummeting stock market and confusing tax rhetoric, and you have the perfect storm for media sensationalism. Virtually every media outlet is promoting a different version of the things you must do now.

So how should we deal with the impending change or rather the continual changes? How do we keep our eyes appropriately focused on long-term wealth planning when virtually all of our attention is drawn to the short-term?

Well it all starts with clearly stated financial goals. A clear conception of what you want allows you to develop concrete actions. Goals provide guidance and direction to your subsequent choices.

Once defined, the goals must be incorporated in a flexible and dynamic long-term financial plan that contemplates the proverbial what ifs. What should you do if a family member dies? What steps should you take if inflation rises to levels that existed decades ago? How should you continue to grow your wealth in a rising tax environment? Having answers to these questions before circumstances change will provide you with appropriate actions that can be efficiently implemented. Moreover they will alleviate any concerns about your ability to achieve your goals.

You have a coach at Truepoint who is mutually committed to your plan and embraces the goals as if they were our own. Our strong commitment to your goals will discourage acting in a manner that is inconsistent with your goals and could unknowingly erode your progress.