What the Shutdown Really Means for Your Money - Tom Wheelwright, Pete Sepp

Key Concepts

• Government Shutdown: A situation where government operations are halted due to a failure to pass appropriations bills.
• Fiscal Policy: Government actions related to spending and taxation.
• Taxpayer Advocate: An individual or organization that represents the interests of taxpayers.
• "One Big Beautiful Bill" Act: Legislation aimed at reducing tax burdens, creating deductions and credits, and initiating spending restraint, particularly in Medicaid.
• Medicaid: A joint federal and state program providing healthcare for low-income Americans.
• Obamacare (ACA) Credits/Subsidies: Financial assistance to help individuals purchase health insurance.
• COVID-19 Era Extensions: Temporary enhancements to ACA subsidies during the pandemic.
• Deficit Spending: Government spending exceeding revenue, leading to borrowing.
• Inflation: A general increase in prices and decrease in the purchasing value of money.
• Sovereign Credit Rating: An assessment of a country's ability to repay its debts.
• Debt Service: The cost of paying interest on government debt.
• Short-Term Borrowing: Government debt that matures in less than a year, often with variable interest rates.
• Tariffs: Taxes on imported goods.
• Regressive Tax: A tax that disproportionately affects lower-income individuals.
• Social Security Trust Fund: The fund that pays Social Security benefits.
• Chained CPI (Consumer Price Index): A measure of inflation that is generally lower than other CPI measures.
• 340B Discount Drug Program: A program requiring pharmaceutical manufacturers to offer discounts to certain healthcare facilities.
• Health Savings Accounts (HSAs): Tax-advantaged savings accounts for medical expenses.
• Nonprofit/Tax-Exempt Organizations: Organizations that are exempt from paying certain taxes.
• IRS (Internal Revenue Service): The U.S. tax collection agency.
• Tax Practitioner Hotline: A dedicated phone line for tax professionals to contact the IRS.
• Small Business Administration (SBA): A U.S. government agency that supports entrepreneurs and small businesses.
• Office of the SBA Advocate: An office within the SBA that represents the interests of small businesses.
• Tax Court: A court that hears disputes between taxpayers and the IRS.
• Certified Mail Return Receipt: Proof of delivery for mail sent via certified mail.

Government Shutdown and Fiscal Policy

The discussion centers on the U.S. government shutdown, currently in its second week, with expectations of it continuing. The primary question is the cause and impact of this shutdown. Pete Sap from the National Taxpayers Union explains that the shutdown is driven by a disagreement over fiscal policy, specifically the Democrats' demand for approximately $980 billion.

Democrats' Demands and the "One Big Beautiful Bill" Act

Democrats are reportedly resentful of the "one big beautiful bill" act, which aimed to reduce tax burdens, lower tax rates, and introduce new deductions and credits, particularly for small businesses. Crucially, this act also initiated spending restraint by slowing the projected growth rate of the Medicaid program from about 5% annually to under 3%. Sap clarifies that this is merely a start to necessary spending reforms, not a complete fix for the federal deficit.

Obamacare Credits and Medicaid Spending Restraint

A significant point of contention is the Democrats' desire to make permanent the temporarily enhanced ACA (Obamacare) credits, which were extended during COVID-19 and are set to expire at the end of October. Sap highlights the substantial cost of this, estimated at around $100 billion per year. Furthermore, Democrats aim to roll back the Medicaid spending restraint provisions from the "one big beautiful bill" act. The combined fiscal impact of these demands is nearly a trillion dollars over 10 years.

Financial Implications of Increased Spending

Deficit Spending and Inflation

If the Democrats' demands are met without offsetting revenue, the consequence would be increased deficit spending. Sap explains that deficit spending is essentially a future tax increase on subsequent generations. Failure to repay borrowed money could lead to a crash in the U.S. sovereign credit rating, with agencies like Moody's already having downgraded it.

Short-Term Borrowing Strategy and Interest Rate Volatility

The federal government has shifted its borrowing strategy to short-term debt, which works well in low-interest-rate environments. However, with recent interest rate volatility, a larger portion of debt matures annually, requiring refinancing at potentially higher rates. This has led to debt service becoming a larger expenditure than national defense. Sap draws a parallel to the 2008 financial crisis, where variable-rate mortgages caused significant losses, suggesting the government is engaging in a similar high-stakes gamble with interest rates.

Impact on Inflation and Asset Prices

Sap identifies deficit spending as a major cause of inflation, alongside tariffs. He notes the skyrocketing prices of gold and silver as indicators of rampant inflation, with gold exceeding $4,000 per ounce and silver surpassing $50 per ounce. This suggests a significant loss of purchasing power for the dollar. He also points to other countries moving away from the dollar as their primary currency and the government's ongoing failure to control its finances as long-term inflation signals. Inflation is described as the "worst kind of tax" because it is regressive, disproportionately harming lower-income individuals.

The Nature of Government Shutdowns and Taxes

Sap asserts that government shutdowns are fundamentally about taxes. He attributes this to the dysfunctional budget process, where Congress has failed to pass budgets on time in 43 of the last 47 fiscal years, often leading to shutdowns or the threat thereof. This indicates a deep disagreement on the appropriate level of taxes and spending.

Types of Taxes and Future Concerns

While income tax and tariffs are mentioned, Sap emphasizes the growing importance of the payroll tax. He projects that in seven years, the Social Security trust fund will be unable to cover its obligations, necessitating either benefit restructuring or tax increases, likely impacting the payroll tax.

Social Security and its Challenges

The conversation delves into Social Security, with President Biden's proposal to raise the Social Security tax cap being discussed. Sap expresses concern about any tax increases and advocates for adjustments to the future benefit formula. He notes that the U.S. Social Security system is skewed towards higher-income retirees compared to flatter systems in other countries. He also suggests reviewing the more generous inflation measure used for Social Security cost-of-living adjustments compared to the chained CPI used for tax brackets.

International Comparisons and Political Hurdles

The situation in France, where proposed increases to the retirement age have led to widespread protests, is cited as an example of the political difficulty in addressing Social Security solvency. Sap attributes this difficulty in the U.S. to the voting power of the over-65 demographic. He highlights the paradox that younger workers have little faith in Social Security's future, yet significant reforms that would not affect current retirees are difficult to pass. He contrasts this with countries like France, which are considering raising the retirement age to 64, while in the U.S., it is already 67.

Medicaid and Healthcare System Issues

Medicaid Expansion and Affordability

Sap discusses the expansion of Medicaid under President Obama, noting that it originally was intended for those unable to work (disabled or caregivers). The program has grown to a point where some Medicaid recipients might be able to afford private insurance. The core question, he argues, is how to afford care for the neediest while ensuring those just above the poverty line can access affordable private insurance.

Obamacare Credits and High-Income Eligibility

The discussion revisits the Obamacare credits, specifically the claim that individuals earning up to $600,000 can receive them. Sap clarifies that this is due to the temporary COVID-era expansion of subsidies, which removed income caps and aimed to prevent people from losing health insurance during mass layoffs. He explains that these subsidies can be substantial for individuals in high-cost insurance areas with large families who cannot obtain coverage elsewhere. While some of these subsidies are clawed back upon filing taxes, the federal government's accounting of the net impact is imperfect.

Proposed Solutions for Healthcare Affordability

Sap outlines several potential solutions for healthcare affordability:

1. Empowering individuals with their own dollars: Allowing people to choose their insurance coverage rather than having it dictated by the government.
2. Deregulation in insurance markets: Enabling the offering of plans with higher upside exposure but capped out-of-pocket costs.
3. Affordability of prescription drugs: Cutting out middlemen and allowing direct rebates at the pharmacy counter.
4. Consolidating tax programs: Combining programs like HSAs into a single, understandable medical expense deduction or credit.

Medicare Buy-In and Non-Profit Tax Exemptions

The idea of allowing individuals to buy into Medicare is raised. Sap acknowledges that Medicare itself has issues that need fixing, but a voluntary buy-in system could be an option. He also criticizes the tax-exempt status of large organizations like Kaiser Permanente, arguing that it creates an unfair competitive advantage over taxable entities like United Healthcare. He extends this critique to credit unions and universities, suggesting that many "non-profit" organizations are, in reality, highly profitable tax-exempt entities.

IRS Disruptions and Taxpayer Impact

Impact of Shutdown on IRS Operations

The shutdown has caused significant disruption at the IRS, impacting the implementation of the "one big beautiful bill" and the upcoming filing season. Sap notes that the IRS is already behind the scenes retooling systems and altering tax forms. He expresses concern about the IRS's ability to provide adequate guidance and answer technical questions, especially for small business owners who are often targeted by the IRS due to their income level.

Customer Service and Practitioner Support

Sap emphasizes the critical need for a fully functioning IRS with the right personnel to handle rulemakings and provide support. He highlights the frustration of long hold times and the inability of IRS operators to answer basic questions, particularly for tax preparers. He advocates for keeping the practitioner phone line open and staffed by experienced personnel who can answer calls promptly.

Impact on Entrepreneurs and Federal Contractors

Beyond the IRS, the shutdown affects entrepreneurs who contract with the federal government, leading to uncertainty in revenue streams. The Small Business Administration (SBA) and its advocate office are not operating at full strength, hindering their ability to address regulatory and tax challenges facing small businesses. Individuals with cases in Tax Court are also affected, as penalties and interest continue to accrue with no one to consult.

Practical Advice for Entrepreneurs

Sap advises entrepreneurs to:

• Start tax preparation early: Begin the process now, even though the filing season has just ended.
• Plan for international trade: Exporters need to anticipate potential delays in obtaining information from government agencies like the Department of Commerce regarding new tariff policies or licensing requirements.
• Document everything: Keep meticulous records and plan how to obtain answers to questions that could impact cash flow.

Conclusion and Call to Action

The conversation concludes with a strong emphasis on proactive planning for entrepreneurs. Sap reiterates the importance of starting tax preparation early, ensuring bookkeeping and documentation are in order, and being prepared for potential disruptions in government services. The National Taxpayers Union can be found online at ntu.org. The Wealthability Show aims to equip listeners with actionable steps to navigate government shutdowns, tax increases, and other disruptions to build wealth and pay less tax.