STOP SPENDING MONEY | Why The Middle Class Is Screwed
What's up guys? It's Graham here. So it's no surprise the middle class is getting screwed, with incomes falling behind the cost of living, minimum wage dropping to its lowest purchasing power since 1956, and consumer debt ramping up alongside inflation. Most Americans are taking up second jobs to make up the shortfall, and the cause of everything? That's right, it's Millennials.
Okay, but in all seriousness, even though my very own millennial generation is spending a lot of money, Congress wants to do something about it. So they've created two brand new proposals: the Middle Class Savings and Investment Act and the Inflation Relief Act, which were both aimed at giving tax credits to those who quite literally stop spending their money. So let's talk about exactly what these new proposals would mean, how they would reward people for spending less money, and if this would be enough to bring down the rate of inflation.
Although, before we start, a different study actually found that one of the best ways to reduce inflation is by hitting the like button and subscribing if you haven't done that already. Okay, I may have just made that up, but if you appreciate the subtle humor, it would mean a lot to me if you subscribed since that's totally free and is a thank you for doing that. Here's a picture of Will Ferrell! So thank you guys so much, and also a big thank you to Ritual for sponsoring this video, but more on that later.
All right, so to bring you up to speed, here's what we're currently dealing with: inflation is the highest it's been since 1981. Prices have continued to rise at a rate of eight to nine percent year over year, and we still don't know when or how this will end. As interest rates increase, you know, even though I joked about this all being Millennials' faults, one investment strategist says no, really, Millennials have become the largest generation on record and they've entered an age where they're beginning to spend a lot of money.
At the core, the problem is simply too many people with too much money chasing too few goods. So, as a way to counteract these increases, regardless of who's to blame, Congress has come up with two brand new proposals. The first is the Inflation Relief Act of 2022. Just like Californians would receive up to one thousand fifty dollars for joint filers making up to five hundred thousand dollars a year, this proposal will provide inflation relief to low and middle-class Americans by indexing tax credits to inflation.
And if that sounds confusing, here's all you need to know:
The Child Tax Credit. This is the largest trial tax credit ever in history, and if this proposal passes, it would index those amounts to inflation. So, if inflation is nine percent a year, then those amounts would also be increased by nine percent.
The Child Independent Care Credit. Just like the previous example, if this were to pass, it would also be increased right alongside with inflation.
The American Opportunity Tax Credit. Now, this proposal would not only index those amounts to inflation, but it would also increase the income thresholds that would qualify. That way, people aren't punished for needing to make more money to pay for things that cost more because people make more money.
The Lifetime Learning Credit, and five, we also have the student loan interest deduction. This is a big one. As of now, you're able to deduct the interest on student loans for up to twenty-five hundred dollars a year, but this would allow you to increase that amount by the same rate of inflation. So imagine if everything stays the same, but inflation goes up by nine percent, so do your tax deductions.
However, this is just the very beginning, because the next proposal is aimed at getting more money back to middle-class Americans, and that would be the Middle Class Savings and Investment Act. This new bill has the sole purpose of getting you to spend less money, and if you could follow along, you will be handsomely rewarded.
To start, it would change the tax rates of long-term capital gains. See, as of right now, when you hold your investment for longer than a year, your tax rate is substantially reduced. In fact, if you're married and you make less than eighty-three thousand dollars a year, your long-term capital gains tax rate is zero percent, meaning you'll pay nothing in federal income taxes. Under this new proposal, however, that amount would be amended with a zero percent capital gains tax rate being applied to those making up to one hundred sixty-five thousand dollars a year filing jointly, or eighty-two thousand dollars a year if you're single. That means for a significant portion of the population, they would pay absolutely no federal income tax whatsoever on investment-related income in the stock market or real estate up to those amounts.
Second, the bill would allow for the first three to six hundred dollars that you make in interest income to be completely tax-free. This would also be applied to dividend income. So, if you buy a stock and that stock pays you three hundred dollars a year for holding it, well congratulations, you'll owe no money on that income whatsoever!
For my wealthier viewers out there, this also modifies the net investment tax, which as of right now applies a 3.8 surtax to investment income if you make more than two hundred to two hundred fifty thousand dollars a year. This new bill, though, would remove the marriage penalty by increasing the two hundred fifty thousand dollar limit to four hundred thousand dollars so that way it's exactly twice the amount that a single filer would receive.
And finally, fourth, we have the enhancement of the Savers Credit. As it stands right now, the Savers Credit gives low and middle-income Americans up to a thousand dollars who contribute to a retirement account, and with this new proposal, that amount would be increased to twenty-five hundred dollars with the income limitations expanded so that more people can qualify.
Of course, money doesn't just grow on trees; it's printed. So as a way to help pay for these tax cuts, it's proposed to extend the SALT cap deduction another three years through 2028. See, prior to 2018, state and local taxes were fully deductible on a federal level, meaning if you work in any state that charges some level of income or property tax, that amount could be fully deducted from your overall income and as a result, you'd pay less in tax.
But that came to an end with the Tax Cuts and Jobs Act. However, that act was never meant to be permanent, and as it stands right now, it's automatically set to expire by the end of 2025. This new proposal, however, would extend that ten-thousand-dollar cap in an effort to give more tax credits back to those who make under four hundred thousand dollars a year, with the hope that this would incentivize people to spend less and save more, especially during a time where we are shifting into a recession.
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And now, with that said, let's get back to the video! All right, now in terms of a shrinking economy and what this means for your money, as of the other day, a new report just confirmed a second quarter decline of GDP, which technically means we've entered a recession. This generally encompasses an environment where less money is spent, our economy contracts, and news outlets can get more clicks from a spooky headline.
But since GDP isn't always a true reflection of the overall economy, the National Bureau of Economic Research updated their definition to include a significant decline in economic activity that could last for a few months to more than a year, and that's usually accompanied by lower employment, production, and sales—tracked on a monthly basis rather than quarterly. The White House even prepped us in advance of this new definition with the understanding that there are no fixed rules or thresholds that trigger a determination of decline.
Or in other words, they're basically saying that we're not in a recession until we tell you we're in a recession, and it's probably going to be once the worst is already over because they take a while. As The Boston Globe points out, throughout the last six recessions that have been confirmed, there is an average lag time of 7.3 months between the time a recession takes place and the time it is actually confirmed. Why does it take so long, you might ask? Well, in the 44 years that they've been operating, they've never once had to rescind or change their declaration, which means they've been extremely accurate.
But as a result, the process takes a long time to complete, which means by the time we know about it, it's already too late. Now, in terms of how this might impact our market, here's where things get interesting. From 1869 to 2018, there have been a total of 16 recessions which had positive stock market returns. In fact, of those positive recessions, the stock market went up an average of 9.8 percent during a time the GDP declined by three percent.
To take that a step further, since 1869, one study found that the correlation between GDP growth and stock market returns was nearly zero. And on average, the U.S. stock market tends to peak about six months prior to the start of a recession.
And that's where we get into the bad news. According to a Wealth of Common Sense blog, throughout every recession that we've seen since 1945, the stock market has at some point seen a sell-off, with the average drawdown coming in at a whopping 29.2 percent, of which we've already somewhat seen, depending on the industry. Although, the good news is that even though there can be a rather abrupt sell-off, by the time our recession is over and actually recovers, it tends to post an average profit of 1.7 percent with an average gain of 15.3 percent in the following one year.
That just means investing during a recession is one of the most profitable times that you could invest, not to mention in the three years following every single recession that we have ever had, the market was 100 percent in the green.
All of that is to say that, based on the data, you shouldn't wait for an official confirmation of a recession to decide it's a good time to invest since the market is forward-thinking. By the time we actually confirm a recession, the opportunity is going to be long gone.
So overall, in terms of my own thoughts about the new proposed tax credits, I have to say it does make sense to index the income thresholds and contributions to inflation. After all, a five thousand dollar contribution to a Roth IRA in 2008 would be the equivalent of investing almost sixty-nine hundred dollars today. But here we are with the six thousand dollar limit that is yet to be adjusted while everything else goes up in price.
This is one of the reasons why we have a lower long-term capital gains tax rate to begin with. That's because when you invest your money, not only are you putting your capital at risk, but you're also losing purchasing power to inflation. And that inflation adds up. Just consider that had you invested a hundred thousand dollars in 1922 that only increased with inflation, you would have almost 1.7 million dollars in today's money, of which if you sold, you would be subject to a 20 percent tax rate, which would leave you with less purchasing power today than you had back in 1922.
That's why the government wants to incentivize people to invest long-term with money that gets redeployed back into businesses with greater economic opportunities with, of course, a lower tax rate. Now, practically though, I'm not quite sure how these proposals would help reduce inflation. The way I see it, this is only going to help the people who have the disposable income to invest.
And for everybody else, yes, the tax credits would help, but would that help bring down food and energy prices? Probably not. That's why I think this is a reasonable proposal that's going to help a lot of people, but not for the purpose of bringing down inflation. Unfortunately, that's probably going to need a lot more sustained effort long-term, and I wouldn't be surprised if tax rates are negotiated at a later time when they're set to expire at the end of 2025.
But at least in the meantime, you could do your best to save as much money as possible, dollar cost average into the markets on a regular basis, and always, no matter what, also feel free to add me on Instagram. Thank you so much for watching, and until next time!