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Major Indexes For Week Ended 2/8/2019

Index Close Net Change % Change YTD YTD %
DJIA 25,106.33 +42.44 0.17 +1,778.87 7.63
NASDAQ 7,298.20 +34.33 0.47 +662.92 9.99
S&P500 2,707.88 +1.35 0.05 +201.03 8.02
Russell 2000 1,506.39 +4.34 0.29 +157.83 11.70
International 1,804.73 -25.31 -1.38 +84.85 4.93
10-year bond 2.63% -0.06% -0.06%
30-year T-bond 2.98% -0.05% -0.04%
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

Five Observations About The CBO's New Long-Term Debt Forecast

A key determinant of the growth of wealth for Americans over the next decade is likely to be the federal debt. On January 28th, the non-partisan Congressional Budget Office released its annual 10-year forecast of the debt. Here's what the CBO said along with five observations adding context to understand this risk to U.S. investors.

1. This frightening long-term projection by the CBO is very unlikely to be the course of the federal debt in the future. We're at the beginning of the explosion in the federal debt and it becomes unsustainable in the years just ahead. The long-term debt accelerates annually because of federal deficits in this CBO projection of a budget deficit in 2018 of 3.8% rising to 4.4% annually in 2029, resulting in the stratospherically-soaring forecast through 2047. This scary picture assumes nothing is going to be done about it in the years just ahead.

2. The debt problem is not so hard to solve if you look at the math. The scary soaring debt is not inevitable; it's not even hard to avoid! Independent economist Fritz Meyer, whose research we license to share with you, says the optimal annual federal spending deficit is 2.9%, which is not so much lower than the scary soaring projection rising from 3.8% in 2018 to 4.4% in 2029. To be clear, any combination of spending cuts or tax hikes that lowers the annual budget deficit to 2.9% of gross domestic product annually for the long run solves the problem of funding Medicare, Medicaid and Social Security. Budget deficits equal to 2.9% of GDP would result in no increase in debt as a percentage of GDP.

3. Balancing the budget would be a bad idea. While a popular political slogan, a policy of balancing the federal budget annually would be ill-advised. The government has an infinite lifespan, unlike people. The federal debt is not like your family balance sheet. Optimizing the infinite lifespan and unique credit status of the U.S. by leveraging these assets is rationally appropriate. Running an annual deficit is wise, as long as debt payments do not overcome America's ability to pay it off. A prudent amount of debt is the optimal goal.

4. The U.S. is a low-tax nation. According to the Organization of Economic Development, the U.S. once again this year was among the lowest-taxed nations in the world. The U.S. has one of the lowest total tax burdens among the 34 OECD countries. The economies with lower tax burdens than the U.S. are tiny in size by comparison. The U.S. is in a class by itself because it is much larger and growing fast, yet its tax rate is relatively very low.

5. The long-term debt of the U.S. is not a financial problem, but a political one. Compared to Germany and France, U.S. tax revenue as a percentage of gross domestic product was much lower. With much stronger growth prospects than Germany or France, slightly increasing tax revenue in the U.S. would not materially change this picture, underscoring that solving the long-term federal debt issue is not a financial problem, but rather a political one.

Despite the long-term U.S. Government debt, a looming trade war with China, and many other problems, the Standard & Poor's 500 stock market closed on Friday at 2,707.88— just 7.6% below its all-time closing high on September 20th, 2018. The S&P 500 index, a key growth component in a broadly diversified portfolio, closed last Friday at 2,706.53, up from 2664.76 a week earlier. The market suffered a 19.8% plunge from September 20th's all-time closing high to the Christmas Eve closing low of 2,351.10, and then it rebounded.

1CBO's 10-year and extended baselines generally reflect current law and are meant to serve as benchmarks for measuring the budgetary effects of proposed changes in federal revenues or spending. They are not meant to be predictions of future budgetary outcomes; rather, they represent CBO's best assessment of how the economy and other factors would affect revenues and spending if current law generally remained unchanged.

OECD, Revenue Statistics 2018. 2017 data for all countries except 2016 data for Australia and Japan. Includes data for the 36 OECD countries and does not include non-OECD countries such as China, Brazil, India and Russia. Includes all forms of taxes: federal, state and local; income taxes, sales taxes, VAT taxes, estate taxes, property taxes, etc.

This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.

NINGs, WINGs And DINGs: Tax Angles

The winds of tax reform are swirling around our nation's capital. At this point, it is uncertain whether any sweeping reforms will be enacted, or when, but proposals from the Trump administration and Republican leaders have spurred anticipation. The proposed changes include revisions in tax rates and the repeal of most itemized deductions for individuals, including state and local taxes (SALT).

Tax reform talk has also created a buzz about NINGs, WINGs, and DINGs. These trusts—Nevada incomplete-gift nongrantor gift (NING), Wyoming incomplete-gift nongrantor gift (WING), and Delaware incomplete-gift nongrantor gift (DING)—may save money for residents of states with high income taxes.

First, income is taxed on the federal level. The top federal income tax rate is 39.6%, although proposed tax legislation would lower it to 35%. The maximum tax rate on long-term capital gains is only 15%, or 20% for those in that top ordinary income bracket. Furthermore, some high-income investors are hit with a 3.8% tax on "net investment income" (NII). Between the top federal rate and the NII tax, you might pay a tax rate as high as 43.4%.

Next, almost all states also have income taxes with widely varying rates that are highest in California, New York, and New Jersey. (California's rates top out at 13.3%.) When you combine federal and state income taxes, you could easily pay a rate of more than 50% on some of your income.

But a handful of states has no income tax, which is where NINGs, WINGs, and DINGs come into play. Nevada, Wyoming, and Delaware are known for "self-settled" trusts designed to take advantage of the rules in those states. Such trusts are structured so that the settlor or grantor (the person creating the trust) and its beneficiary are one and the same, but they avoid being designated grantor trusts whose income would be taxed to grantors at their home states' income tax rates.

Instead, these trusts can be funded with contributions that aren't considered taxable gifts for federal gift tax purposes, and the grantor retains the right to receive discretionary distributions of trust income and principal. Because the accumulating income isn't subject to state income tax, these self-settled trusts have become a popular way to minimize tax on income from large sales of property.

This could make sense for you regardless of the twists and turns of tax reform, although a SALT repeal would add even more incentive. Consult with your professional financial and tax advisors about your situation.

The above referenced information was obtained from reliable sources, however Lantern Investments, Inc. and Lantern Wealth Advisors, LLC cannot guarantee its accuracy. Opinions expressed herein are subject to change. Past performance is no guarantee of future results. Asset allocation and diversification do not assure a profit or protect against losses in declining markets. Any information given on the site is informational and illustrative but does not recommend actions as the information may not be appropriate to all situations. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. Links to other sites are provided for your convenience. Lantern Wealth Advisors, LLC and Lantern Investments, Inc. do not endorse, verify or attest to the accuracy of the content of the web sites that are linked and accept no responsibility for their use or content. Lantern Wealth Advisors, LLC and Lantern Investments, Inc. do not provide tax, accounting or legal advice.