Responding rationally to inevitable future tax hikes

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In his Generation Risk blog over at CNNMoney.com, Money magazine’s Pat Regnier (a former Time writer, by the way) warns of the “Great Tax Hike” to come:

Besides the current budget deficit, future lawmakers are going have to wrestle with the mounting costs of Social Security and Medicare. And whatever “peace dividend” we may have enjoyed after the end of the Cold War has been spent, and then some. We’re going to be spending a lot on defense for the foreseeable future. The financial outlook points strongly to higher taxes.

I’ve written about this subject a bit myself, but Pat, writing as he does for a personal finance magazine, raises a really important question: What should individual taxpayers do about it?

The most obvious thing would be to put money in a Roth IRA, so it won’t be subject to higher income taxes decades from now when you pull it out. But Regnier points out that tomorrow’s higher taxes may be not on income but on consumption: a higher gas tax and a new value-added tax have been the most-talked-about options. The purely rational economic response to the expectation of higher future consumption taxes is to spend more now and save less. Which, remarkably enough, is exactly what Americans have been doing. Are we the most rational country ever or what?

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