Retroactive Tax Hike May Be in the Cards

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Right now, the political debate in Washington, D.C. is focused on how to slice $60 billion from a budget in order to avoid a government shutdown. Where's the discussion about reducing the $14.2 trillion that remains in arrears?

Given our nation's exploding debt burden, the time has come for politicians to face the music. This leads to the current Congressional dilemma. Do Congressmen really want to face constituents and raise taxes to reduce the debt? Alternatively, do legislators want to reduce aid to our country's growing number of impoverished citizens in an attempt to cut the fat?

In a world where our House Representatives are up for election every two years and the President's term lasts four short years, highlighting any negative aspect of life is political suicide. Inconveniences such as debt reduction can only be dealt with on a crisis-basis. Finger-pointing is a much safer way to cruise through political life than taking the blame for woeful decision-making and its consequences.

Amid the political bickering and posturing, however, a compromised solution to lowering our nation's debt will inevitably surface. Legislators will come to the realization that it is less politically harmful, and a lot less economically disruptive, to raise taxes on past income rather than on future income.

Politicians are rightfully reluctant to increase taxes on the current labor force as that might create a disincentive to work longer hours, thereby worsening the country's ability to reduce its debt over time. Moreover, taking away health benefits for the sick, elderly and impoverished is outright cruel if not politically impossible in our current environment. Accordingly, the government's "easiest" first step toward fiscal austerity is to renege on its Social Security obligations.

Accordingly, Congressmen may soon be suggesting that the age for someone to be eligible for Social Security should be older than current law dictates. They may point to the recent Bowles-Simpson Deficit Plan that proposed raising from 62 to 64 the age when Social Security benefits can first be claimed, and raising from 66 to 69 the age when full Social Security benefits can be claimed. Legislators may even suggest "a means test" whereby persons with a certain net worth are simply not eligible to receive the Social Security payments to which they have been promised.

This proclamation as a solution to our government's debt problem will be framed under the banner of nationalistic pride and sacrifice. In this way, legislators will artfully dodge acknowledging the ugly truth that they've just instituted a large retroactive tax hike -- a tax hike that even Republicans could approve.

The amazing thing is that everyone in Washington knows exactly what must one day be done, but no one wants to be the politician to say so, because that politician is afraid that the other politicians will use it against him/her. A joint statement from the leaders of both political parties recommending both spending cuts in entitlements (Medicare, Medicaid and Social Security) and revenue raising strategies (which would entail reworking our complicated income and corporate tax rates as well as potentially establishing a value-added tax) would get us past this problem. All we need is for the politicians to put aside their differences for the good of the country.

Alan Zafran is a partner of Luminous Capital, a $4 billion financial-advisory firm providing wealth-management services to high-net-worth families. He has over 20 years of industry experience, previously serving as a wealth adviser for affluent families at Goldman Sachs and Merrill Lynch. Zafran's experiences include facilitating the execution of credit default swaps on subprime residential mortgages in 2006 and 2007 before the market crashed. He is a contributor to TheStreet, Forbes.com and Wall Street Week. Zafran received his MBA from Harvard Business School after graduating Phi Beta Kappa from Stanford University.

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