One of the joys of living in Washington is that I am always among the first to know what our overlords–of course I mean our democratic representatives–want from us. With the imminent signing of the budget deal, the powers that be have sent us the message that they want some behavior changes–pronto.
First, it's time to quit smoking, since Congress's otherwise dedicated band of tax reducers hiked taxes on cigarettes. Good thing I already quit. Actually, this would be a terrible time for me to start smoking again, considering all the time the government wants me to spend in various nonsmoking offices.
My first stop will be the financial aid office at the university I am attending at night. I have been financing my education with earnings from my day job. This meant forgoing a candlelight dinner or two with my girlfriend, but I thought it was worth it to graduate debt-free. (And since she is now my fiancee, she must have agreed.) Now I discover in the deal's fine print that not only will the government subsidize my student loan by delaying the date that interest starts accruing, but it will also let me write off the interest up to $2,500 a year! I am working toward a masters in economics, and I understand a relative price change when I see one. Virtually free money–now that's a deal.
But this isn't the only financing tool that my benefactors here in Washington are providing me. They have just created a new form of tax-sheltered savings, an IRA Plus. This nifty tool will allow me to save some of my after-tax income in an account that accrues interest tax-free. My subsidized student loan will free up some after-tax income to save–even though I face the same high tax rates. Washington rarely bestows gifts without strings, however: My savings is only tax free if I spend it on things the government deems worthy of subsidizing–namely housing, education or retirement.
To inquire into what this all means to me, I have another office to visit–Merrill Lynch. That firm took out a full-page ad in a congressional trade publication, the Hill, hailing these changes as a "critical national investment in our future," so it should understand the fine print. I will ask a couple of questions, while I'm itching to go outside for a cigarette. First, can I pay off my subsidized student loan with money that accrues tax free in my IRA Plus? It seems to me that such withdrawals are for educational expenses, even if I do spend the loan on something else. Second, can I convert my regular mutual fund, that instrument that I have been using to save money for a house even before the government advised me to do so, to an IRA Plus? For the past five years, the capital gains and income taxes on the fund's return have really cut into my nascent nest egg.
I still have to consult my fiancee, but this also seems like the time to start a family. If we get started before the honeymoon, the little one might just come along to save us $500 next year. So now I face a conundrum, one so mind-bending that I may just have to light up a few coffin nails to ponder it. Twentysomethings, such as myself, face tax burdens much higher than those of even a generation ago, and thus must struggle to save enough money to have children. But now we are offered relief from the tax burden if we have children before we save.
Wouldn't it be nice if our political poobahs, instead of prodding us with tax incentives, just cut our tax rates across the board? And if, instead of breaking their arms patting themselves on the back, they actually did the work of reforming Social Security and Medicare–two programs that chew a hole in everyone's paychecks?
But I gotta run to an appointment with my investment, I mean tax, adviser. One last question: Should I buy a pack of Camels or Marlboros on the way?