Financial Cheats… and the Goverment?

Recent years have brought us a steady stream of financial cheats, frauds, and scams. Bernard Madoff, of course. Currently in jail. The guys who brought us Enron. Currently in jail. Bernard Ebbers, head of WorldCom. Currently in jail. And . . . Uncle Sam?

That’s right, our own beloved Uncle Sam is arguably as guilty of “cooking the books” as any corporate scammer. In fact, if he were running a publicly-traded company the way he’s running the government, he’d likely be serving time in one of his own prisons!

Accrual Vs. Cash Accounting

Here’s the issue. Most of us use what’s called the “cash” method of accounting. It’s pretty simple, really. Cash comes in, cash goes out, and at the end of the year there’s a difference we call “profit” or “loss.” In Washington, they call those year-end results “surplus” or “deficit.” For fiscal 2010, that deficit was $1.3 trillion, and our total national debt now stands at $13.9 trillion (give or take a few billion).

But publicly-traded companies and bigger privately-held businesses are required to use the “accrual” method of accounting. That method requires them to recognize income and expenses when incurred, rather than actually paid. It’s kind of like recognizing you owe 30 years of mortgage payments the day you buy your house. And according to the 268-page Financial Report of the U.S. Government (the closest thing we have to a federal “balance sheet”), if Uncle Sam used the accrual method, the government’s “net operating cost” for 2010 soars all the way to $2.1 trillion!

Social Security is the classic example of “off books” federal accounting. Actuaries estimate that over the next 75 years, the system will spend $8 trillion more in benefits than it takes in from payroll taxes and interest on the Social Security “trust fund.” And Uncle Sam owes even more for unfunded promises like future Medicare benefits ($23 trillion), retirement benefits for federal employees and veterans ($5.7 trillion), environmental cleanup costs ($300 billion), and loan guarantees related to Fannie Mae and Freddie Mac ($600 billion). Those trillion-dollar promises are certainly part of the federal debt. But you won’t find them listed in any official balance sheet!

Federal Debt Leads to Higher Taxes?

What does this all have to do with taxes? Well, regardless of how we calculate the federal debt, there’s only one way to eliminate it. At some point, the government is going to have spend less than it makes. And that’s going to mean higher taxes. If you’re dreading the tax hikes necessary to close a $1.3 trillion deficit, just imagine what you’ll need to pay to eliminate $2.1 trillion!

That’s why we’re now focusing more of our practice on tax planning. If we’re going to deliver the most value possible, it’s not enough just to look at your finances in relation to where taxes are now. We have to look at them them in relation to where taxes are going to be. So look to us for more than “just” a tax return this year. And remember, we’re here for your friends, family, and colleagues too!