National Sales Tax?

February 1, 2023

 

You might wonder what all the hoopla is over the proposal, in Congress, to impose a national sales tax on everything we purchase.  After all, 45 of our 50 states collect sales taxes.  And 170 different countries collect something similar: a value-added tax, which is assessed on different purchases across the supply chain for manufactured articles and digital services, which is ultimately passed on to the consumer.

 

The proposal, codified in something called the Fair Tax Act that was introduced in the House of Representatives on January 10, would eliminate all income taxes, payroll taxes and corporate taxes, and incidentally also eliminate the Internal Revenue Service.  It would replace those lost revenues with a tax on every item sold in the U.S., which has variably been reported to be 23% or 30%.  The plan was actually created by the Church of Scientology during the Reagan presidency, and has been floating on the margins of political respectability ever since.

 

There are several challenges to implementing a national sales tax.  One of them is the practical aspects of it.  The bill would have each state make the actual collections on sales within their boundaries (including, of course, the five states that don’t administer a sales tax), but only provides one quarter of one percent of the collected revenue for the trouble.  Instead of an IRS, you would have 50 states with their own underfunded collection bureaucracies.

 

The political challenge is probably more problematic.  The headlines today are talking about the high cost of goods and services and the overall inflation rate.  Making things more costly for consumers in a highly-visible way—right there on the price tags—might not be a popular idea at this time.  Moreover, the 23% rate that the sponsors are pushing is not entirely accurate.  The proposal would impose a $30 national sales tax on every $100 that you spend, which, if you don’t have a calculator handy, comes to a 30% price increase, and should probably be referred to as a 30% tax.  The 23% figure comes when someone says that $30 is just 23 percent of the $130 amount that the consumer is paying, which seems to be a sly mathematical sleight of hand.

 

Then, there’s the fairness angle.  The sales tax would fall most heavily on people who spend most of their income on goods and services—things like food, transportation, clothing and the roof over their heads.  People with more space between what they earn and what they have to spend on essentials would escape taxation on that ‘discretionary’ income.  The ‘fair tax’ would be a Godsend to wealthier individuals, who could simply stash away a big chunk of their earnings untouched by government hands.  Meanwhile, corporations would escape taxation altogether.

 

Finally, would the proposed sales tax replace the revenues generated by the various taxes we have on the books today?  Probably not.  A 2004 study from the Tax Policy Center estimated that we would need a national sales tax rate of 60% to generate the current level of tax income collected by the federal government.  So if the proposal passed, it would lead to tax increases in the future.

 

The ‘fair tax’ stands very little chance of passing the House of Representative, never mind the Senate, never mind getting signed into law by a Democratic president.  But you will see something like this proposal come up again and again in the future, and who knows?  Perhaps one day the political winds will blow it into law.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

https://www.avalara.com/vatlive/en/vat-news/6-differences-between-vat-and-us-sales-tax.html#:~:text=VAT%20is%20imposed%20in%20around,to%20stay%20compliant%20across%20both.

https://www.yahoo.com/finance/news/democrats-revel-in-the-gops-doozy-of-an-idea-for-a-national-sales-tax-210400152.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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SECURE Act 2.0: An Overview

January 17, 2023

In the final days of 2022, Congress passed a new set of retirement rules designed to facilitate contribution to retirement plans and access to those funds earmarked for retirement.

The law is called SECURE 2.0, and it is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019.

The sweeping legislation has dozens of significant provisions; here are the major provisions of the new law.

New Distribution Rules

Required minimum distribution (RMD) age will rise to 73 years in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking RMDs. Further, starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. However, if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.1

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, 2024 onward, an employee can take up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.2

Reduced penalty. Starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25 percent from 50 percent. If you promptly fix the mistake, the penalty may drop to 10 percent.3

New Accumulation Rules

Catch-up contributions. From January 1, 2025, investors aged 60 through 63 years can make annual catch-up contributions of up to $10,000 to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals with annual earnings more than $145,000.4

Automatic enrollment. In 2025, the Act requires employers to automatically enroll employees into workplace plans. However, employees can choose to opt-out.5

Student loan matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.6

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, employers can roll a 529 education savings plan into a Roth individual retirement account (IRA). Therefore, if your child receives a scholarship, goes to a less expensive school, or does not go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are also allowed under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.7

SIMPLE and SEP. 2023 onward, employers can make Roth contributions to savings incentive match plans for employees (SIMPLE) or simplified employee pension (SEP).8

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 401(b)s with Roth IRA rules. From 2024, the legislation no longer requires minimum distributions from Roth accounts in employer retirement plans.9

More Highlights

Support for small businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100 percent from 50 percent for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.10

Qualified charitable donations (QCDs). 2023 onward, QCDs will adjust for inflation. The limit applies on an individual basis; therefore, for a married couple, each person who is 70½ years and older can make a QCD as long as it remains under the limit.11

The change in retirement rules does not mean adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changes to another.

Moreover, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It is not intended as a substitute for real-life advice. If changes are appropriate, we as your financial professionals can outline an approach and work with your tax and legal professionals, if applicable.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

1. Fidelity.com, December 23, 2022
2. CNBC.com, December 22, 2022
3. Fidelity.com, December 22, 2022
4. Fidelity.com, December 22, 2022
5. Paychex.com, December 30, 2022
6. PlanSponsor.com, December 27, 2022
7. CNBC.com, December 23, 2022
8. Forbes.com, January 5, 2023
9. Forbes.com, January 5, 2023
10. Paychex.com, December 30, 2022
11. FidelityCharitable.org, December 29, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

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The Cure

September 28, 2022

 

My goodness; stocks are taking a terrible beating these days.  From the way the market is behaving, one might think that some of the world’s largest and most profitable companies are suddenly becoming dramatically less valuable.  Are they all laying off workers, slashing prices, closing factories and declaring imminent bankruptcy?

 

If this is sending you to anxiously scan the headlines, don’t bother; none of that is happening.  Stock prices have never been a precise indicator of what companies are worth.  They are a very good indicator of what people are willing to pay for their shares, and right now there seems to be more sellers than buyers.

 

Why?  The reasons for bear markets are seldom rational—which, of course, is why bear markets end and stocks return to (and always, in the past, have surpassed) their original highs.  What’s happening right now is not unlike what happens when one of our children is diagnosed with an illness, and the remedy is a daily dose of some awful-tasting medicine.  The illness, in this case, is inflation, which absolutely has to be cured if we are to experience a healthy economic life.  Few things are worse than having the money you’ve saved up deteriorate in value at double-digit rates, which is precisely what has been happening this year.

 

The cure, which any child will tell you can sometimes be more unpleasant than the illness itself, is the U.S. Federal Reserve raising interest rates, which is its way of reducing the amount of cash sloshing around in the economy.  Rising consumer prices, just like rising stock prices, come about when there are more buyers than sellers.  Reducing the available cash reduces the number of buyers in relation to sellers (ironically, both in the consumer marketplace and on Wall Street), and finally slows down the inflation rate to manageable levels. 

 

We can already see how this works in the housing market, where, just a few short months ago, multiple would-be buyers were bidding against each other to pay more than the asking prices.  As mortgage rates have risen, the frenzy has completely dissipated.  The process takes longer in the consumer marketplace at large, but you can bet it’s working behind the scenes.

 

Doesn’t less spending mean less economic activity?  Doesn’t that lead to a recession?  The answers, of course, are yes and maybe.  But at this point, a recession might not be all bad for the economy.  Recessions act like a cleansing mechanism, exposing/eliminating waste and inefficiency, ultimately creating a healthier economy when we come out the other end.

 

So right now we’re taking our medicine, and boy does it taste awful.  We are also, collectively, suffering an economic illness.  Anybody who has come down with a bug and taken medicine to cure it knows that the former unpleasantness doesn’t last forever, and therefore neither does the latter.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Source:

 

https://www.nytimes.com/2022/05/14/business/inflation-interest-rates.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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No Fed to the Rescue

September 16, 2022

 

With two consecutive quarters of negative GDP growth, high inflation and markets that have persistently delivered bearish returns, the hope was that the U.S. Federal Reserve was busily looking for a way to execute a ‘soft landing’—meaning, basically, a return to modest economic growth, higher market returns and lower inflation.  It now seems clear that that is not the Fed’s plan.

 

In a recent speech in Jackson Hole, WY, Fed Chair Jerome Powell announced that he will do whatever it takes, pretty much to the exclusion of economic growth and better market returns, to drive inflation down to the 1.8% annual goal that has been recent Fed policy.  He said, bluntly, that “reducing inflation is likely to require a sustained period of below-trend growth.”  Translated, that means higher short-term bond rates and an indifferent attitude toward more economic pain.

 

The speech even seemed to be attacking the nation’s historically low 3.5% unemployment rate, the lone bright spot among a lot of otherwise grim economic statistics.  Powell surprised many economists by asserting that, in his view, the labor market was “clearly out of balance” because the demand for workers exceeds supply. 

 

Overall, the speech seemed to hint at another jumbo 75 basis point increase in the Fed Funds Rate later this month.  If (when) that happens, it will grab headlines, but it might not be the most significant growth-slowing measure the Fed will be taking.  The U.S. central bank is also accelerating the process of selling off the Treasury and mortgage bonds on its balance sheet, doubling the monthly sales from $47.5 billion to $95 billion.  It’s important to note that when the Fed was buying these bonds, the so-called QE (quantitative easing) buoyed the stock market.  The opposite, called quantitative tightening (QT to some), might have the opposite effect.

 

Most of us know that the economy will eventually recover from its current doldrums, and the Fed’s current policy will ease up as inflation declines.  What we’re seeing now is the inevitable ‘pay the piper’ moment where the bill comes due from the enormous (and, of course, unsustainable) stimulus that the Fed injected into the economy to end the Great Recession and, not so long afterwards, to pull the country out of the Covid-driven downturn.  The hope now is that it won’t be long before the Fed decides that the piper is paid off, and once again prioritizes growth and profitability in the economy.

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Sources:

https://www.advisorperspectives.com/articles/2022/08/31/powell-abandons-soft-landing-goal-as-he-seeks-growth-recession

https://www.advisorperspectives.com/articles/2022/08/31/the-fed-is-about-to-go-full-throttle-on-qt-fear-not

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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NOT-Transitory Inflation

July 15, 2022

 

For much of last year, the economists at the U.S. Federal Reserve Board confidently told the public that the rampant inflation we were experiencing in the U.S. was ‘transitory.’ 

They were wrong, and increasingly so as time goes on.  This won’t surprise anybody who has been shopping lately, but economists were shocked to discover that the inflation rate rose 9.1% annualized in the month of June.  You would have to go back to 1981 to find a higher rate.  And the usual culprits of the war in Ukraine—food and energy prices—were not the only reason for the cost of living increase.  If you took out those two parts of the inflation calculation, the rate was still 5.9% overall.  The Federal Reserve’s ‘target’ is 2%.

So far, the U.S. Consumer Price Index measure of inflation is running around 8.6%—that is, it costs roughly 8.6% more to fund a normal lifestyle today than it did at this time last year.   This is part of an international trend; the UK is looking at 11% overall price increases, and the Eurozone is experiencing an 8.6% inflation rate.  South Korea’s 6% annual inflation rate is the highest in 24 years, and even Japan, which has flirted with deflation for the past 30 years, is seeing prices rise 2.5%.

How long will this last?  Nobody knows.  The Fed seems committed to driving U.S. inflation down with a series of aggressive interest rate hikes, but with prices rising everywhere else, one wonders how effective this will be.  But perhaps we can take comfort that our cost of living increases are markedly lower than what people are experiencing in Turkey (78% year-over-year), Argentina (60.7%) and Sri Lanka (54.6%).

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

Sources:

https://www.nytimes.com/live/2022/07/13/business/cpi-report-inflation

https://fortune.com/2022/07/09/inflation-rates-around-the-world/

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
Fax: 215-340-5788
Email: Info@KohlheppAdvisors.com

Securities offered through Cambridge Investment Research, Inc. a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Kohlhepp Investment Advisors, Ltd., a Registered Investment Advisor. Kohlhepp Investment Advisors, Ltd. and Cambridge Investment Research Advisors, Inc. are not affiliated.

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