The Line-up for a Second Recession?

I’m an optimist by nature. I have plenty to be optimistic for: we live in one of, if not, the greatest country in the world, receiving the highest standard of living ever known to mankind. I have a wonderful family, I have great friends. I also believe in God, so like the Dali Lama said to Bill Murray in Caddyshack … I will likely receive full enlightenment on my death bed … so I have that going for me.

That said, I’m pessimistic about the coming one to five years as it relates to the secular world and what our political and financial leaders consider prudent. There is a line-up of issues that tells me there may be a high probability of another recession. I would love to be wrong, but at minimum, preparation for the possibility seems prudent.

First, the Federal Government is promising an endless and totally unsustainable spending plan, not to mention the plethora of credit concerns that will still need to come to pass both in the corporate world and individual consumer. If the government spending plan continues to be implemented and if we don’t fix the Social Security and Medicare obligations, it will mathematically hinder our country’s ability to grow as we have grown accustom to.

Second, a massive health care bill is being proposed. Assuming a plan is approved, wealthy and not-so-wealthy taxpayers will likely be forced to pay for the health-care overhaul. The Joint Committee on Taxation reported that fourteen measures in the proposed bills would raise taxes. It estimates the taxes will raise around $370 billion in revenues over the next 10 years. I find this alarming because the Health Care Plan calls for $1.0 to $2.3 TRILLION in additional costs, so the $370 billion to be raised is hardly denting this new and unsustainable obligation. As a good attorney friend of mine says: “You think health care is expensive now? Wait until it’s free.”

Third, states around the country are facing huge deficit problems. A new report by The Pew Center on the States identified nine other states that have similar fiscal problems as California. It should be no surprise to readers that Wisconsin is on that list. I’ve been writing about this to clients for a few years now. As the report highlights: “These states’ troubles can have dramatic consequences for their residents: higher taxes, layoffs or furloughs of state workers, longer waits for public services, more crowded classrooms, higher college tuition, and less support for the poor or unemployed.”

States cannot print money like the Federal Government can, so tax increases and budget cuts are the next path. Although the recent federal stimulus is still in process to be sent to the states; it is being used up quickly and quite frankly, with very little massive benefit. So it seems inevitable that a number of tax and budget changes are coming in order to gap this problem.

Whether you work for the public sector or not, I think it’s important that everyone in Dane county consider the influence of state budget problems and the potential impact in your personal and career planning. Expect more benefits and job cuts at the public level.

Add it all up and the new taxes for the deficit, health care plan, along with higher individual marginal tax rates and expected capital gains increases after 2010 would push the effective tax rate for many upper to high tax payers to record highs.

Readers know this as a fact: wealthy people and upper income tax payers not only already pay the majority of the taxes in this country, they use the remainder of their money to make investments, spend, support jobs, and provide for charity and those in need. Taking more from them means you are taking from fundamental drivers of growth.

Increased taxes and lower benefits means less available for savings and investment. Savings and investment is the only way to secure yours and the country’s long-term financial well-being. It is not any more complicated than that.

A recession is not the end of the world, as we all just saw over the previous 24 months. In fact, it is part of a normal economic cycle of long-term productivity. Nonetheless, it hurts when it happens and we should attempt to minimize the pain. I think it makes sense to prepare yourself for this possibility and then remember, life is good and if we can get through the next the five years successfully, we will continue to do great things.

Michael Dubis is a fee-only Certified Financial Planner (TM) and President of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

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