The Family Office Chronicle August 2022

Fighting Inflation

Here’s a headline from August 12 that no one wanted to read: Inflation costing the average American $717 a month, analysis shows higher prices already cost Americans $8,607 over the past year.

From curtailing driving to shrinkflation, America is looking for ways to economize in the face of persistent high inflation. We’d like to offset all the bad news with one hopeful prospect: the cost of financial and insurance services isn’t in the CPI, but streamlining those costs may reduce or even neutralize the effects of inflation on your family.

You may have heard inflation defined as a tax on American families. Inflation does not fit the technical definition of a tax — a compulsory contribution to state revenue, levied by the government on workers’ income and business profits or added to the cost of some goods, services, and transactions.

However, lots of things “quack like a duck,” meaning operate very much like a tax. Regulations on transportation safety, environmental protections, and food and drug inspection regimes do raise the costs of products we pay for goods and services. Any government action that raises the costs for Americans could be considered a tax. Inflation certainly fits that description.

According to, “a regressive tax is one where the average tax burden decreases with income. Low-income taxpayers pay a disproportionate share of the tax burden, while middle- and high-income taxpayers shoulder a relatively small tax burden.”

Inflation hits every family in its own way, of course. The basket of goods and services that the Bureau of Labor Statistics uses is created by tracking the actual expenditures of thousands of American families, as captured in special diaries kept with meticulous care, but it’s unlikely that any two families spend in exactly the same way.

Now could be a good time to look past food, groceries and utility bills and think about some other, often very significant annual expenditures that could be lowered. In some cases, lowered enough to offset all the other rising prices.

Many Americans simply don’t think about how much money they spend on financial services, things like mutual fund costs and insurance premia.

Mutual funds are notorious for their high, often hidden costs and tax inefficiency. But note this: if you can reduce the costs of your financial products and services by 1%, which for many people is quite possible, you can save $5,000 per year on a half million of investable assets.

For most people, $5,000 will go a long way toward offsetting higher costs at the pump and the checkout counter.

Americans are living much longer than they used to, and marketplace pressures have caused insurance companies to build and offer better policies than they used to. The cost of one dollar of death benefit has dropped in many cases, so you would do well to ask yourself these three questions:

Can I lower my insurance costs? Do I have the right coverage for the life I live now–for example, have my children grown, is my home paid off, etc.?

Can I get a higher death benefit for the same price I’m paying now? Inflation has effectively lowered the purchasing power of death benefits, and your death benefit may not provide as much security as it used to.

Can I get a policy whose cash value grows faster, has better “living” benefits or is more tax-advantaged than the policy I have now? If you aren’t 100% clear on what these terms mean, you really should get a policy review.

And here’s a fourth question: do you have adequate long-term care coverage? If not, here’s some good news: the cost of LTC benefits in modern policy riders is nearly zero. The simple rule of thumb is this: if you bought your life insurance policy before the last census, you may be overpaying while receiving under-coverage.

Inflation is not only regressive, it’s frustrating. But there are things you can do to offset its impact, and we recommend you take a hard look at your investments and insurance. Streamlining and rationalizing in those areas could take some of the sting out of inflation.

Paraphrasing Pericles: “You should take an interest in taxes because taxes are going to take an interest in you”

A newsletter from a tax professional is likely to have an overweight of information about taxes, and this month’s Chronicle is a heavyweight. We will lay out some facts and quotes, and a little opinion, and suggest you take an interest in taxes, because it seems to us that taxes are most definitely going to take an interest in you.

Let’s start with some sobering facts:

  • The federal government collected $4.1 trillion in revenue in fiscal year 2021 — or $12,294 per person.
  • The federal government spent $6.8 trillion in fiscal year 2021 — or $20,634 per person.

Should we say “tax and spend” or is “spend and tax” more accurate? Whichever way you prefer, there has been a historic increase in government spending since 2019, and the Biden administration’s proposed budget calls for $72.7 trillion in spending over the next decade—averaging more than $1.4 trillion in higher annual spending than even this year’s extravagant budget.

Debt would skyrocket from $30.2 trillion today to more than $44.8 trillion over the next decade. Annual budget deficits would start at $1.2 trillion in fiscal year 2023 and rise to $1.8 trillion by 2032.

The budget would even allow Medicare to fall into insolvency in 2026 and the Social Security trust fund to be depleted in 2033.

Proponents of Modern Monetary Theory propound that “deficits don’t matter,” but the current high inflation argues otherwise. From the Atlantic Council:

“According to MMT, a country with monetary sovereignty—thus excluding members of a monetary union such as the euro area—can always issue money to spend without fear of default. More specifically, a government can ask its central bank to print money—or more precisely, to create central bank liabilities to deposit in the government’s account in exchange for government bonds—so that the government can spend on worthwhile projects.

“Persistent deficit spending will eventually get to full employment of the economy’s resources, causing inflation to rise, at which point the government can raise taxes to reduce money from the private sector to cool things down—presumably using such tax revenue to retire government debt. In other words, a government’s spending ability comes from its power to issue money and to compel its citizens to use the money as legal tender while tax is used to control inflation. The last point ignores the fact that raising taxes is difficult in modern societies, involves a lengthy and messy process, and is not wholly suitable to combat inflation.”

The recently enacted Inflation Reduction Act raises taxes and will give the IRS billions to go into what the Wall Street Journal called “beast mode.” From Forbes:

“In all, the bill will dole out about $80 billion to the IRS for increased enforcement, operational improvements, customer service, and systems modernization. That money is more than six times the current annual IRS budget of $12.6 billion. The bill says a whopping $45.6 billion will be for enforcement.”

Also from Forbes,

“For 2021 returns, the seemingly innocuous question asked, ‘At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?’ The IRS says that all taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either ‘Yes’ or ‘No’ to the virtual currency question. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency in 2021.”

There is more. From Heritage,

“Biden’s budget proposes $2.5 trillion in taxes, over and above the across-the-board increase beginning in 2026 from ending the Trump tax cuts on individuals. All Americans’ tax rates would increase under Biden’s plan, and the standard deduction would be cut in half.”

According to Tax Foundation,

“A proposed seven percentage point corporate tax rate hike would give the United States the highest corporate tax rate among the 38 Organization for Economic Cooperation and Development nations. Under Biden’s plan, business expensing for capital investments would start phasing out at the end of this year, making it more expensive to add manufacturing capacity or new equipment.”

We’re sorry for all this bad news, but forewarned is forearmed. Now is the time to get serious about implementing financial plans that incorporate the likelihood of higher taxes on your business and personal income, both from earnings and investments.

Any tax plan is only as good as its implementation. We recommend you take a sober look at how your financial house is ordered, and we stand ready to help you make an objective assessment with our Taxes First, Then Math analysis. There is no cost or obligation for this service.

Taxes, it seems, are about to take an interest in you. Isn’t it time you took an interest in them?