Despite declining federal budget deficits, the large and growing national debt has created a common perception that, at some point, tax burdens must rise to address the issue. While no one knows for certain, the mere belief that higher tax rates are inevitable has become a strong driver for advisors and clients to do whatever they can to manage that future tax exposure.
One of the most popular strategies has been to take tax exposure off the table altogether by contributing to Roth accounts and/or doing Roth conversions. The goal: Pay taxes now, when rates are lower, and not in the future when they may be higher.
Yet a closer look at tax reform paths that could address national debt suggests that while tax burdens may be higher in the aggregate at some point in the future, marginal tax rates will not necessarily be higher. In fact, most reform proposals, from the bipartisan Simpson-Bowles plan to the recent ideas of Rep. Dave Camp (R-Mich.), actually feature a widening of the tax base and an elimination of many deductions, accompanied by a lowering of the tax brackets.