Taxes and the U.S. Deficit - What's Their Future?Submitted by KWB Wealth Managers on December 3rd, 2019
In 2019, Tax Freedom Day for the average taxpayer was April 16th. In higher taxed states, like California, the day was April 20th and, as late as May 3, for those residing in New York and DC. Tax Freedom Day is the day the average American is finally free of their tax burdens, including property, sales, excise, payroll, and income tax for the current tax year. The Tax Foundation estimates that in 2019 Americans will spend more on taxes than they will on the combination of food, clothing, and housing!
It’s no surprise that since 2002 federal expenses have surpassed federal revenues. We call this: the annual deficit. If one were to include the annual federal borrowing, representing the future taxes owed by all of us, Tax Freedom Day would occur on May 8th, approximately 22 days later for the average taxpayer.
Looking forward, there’s little reason to believe that spending and deficits will change for the better. In 2019 we are blessed with a modestly growing economy, low interest rates, nearly full employment, all-time stock market highs, and a healthy real estate market. With this mostly positive economic data, the US still spends about $950 billion more than it takes in. It is likely that 2019 will be the last year the annual budget deficit will be below one trillion dollars. As of August 2019, the total debt of the US was approximately $20 trillion ($20,000,000,000,000.) That’s a lot of zeros! Simply put, and economically speaking, with the economy doing so well, employment rates and markets so high, what would the deficit be like if and/or when things slow down? In other words, what happens the next time we have a recession?
Unfortunately, there are no easy answers, and a day of reckoning may or may not come. However, it sure makes one wonder how we got here. On the political front it’s not a popular or winning strategy to suggest increasing taxes or reduce government sponsored benefits. And, even if you took all the wealth from the US billionaires, you’d only raise about $1 trillion. That is barely enough to cover one year’s worth of overspending.
For the moment, the markets don’t seem bothered by the ever-increasing debt or its trajectory. Should we care? Truth is, only when we look back will we know the answer. In the meantime, plan on increased taxes over time and possibly reduced government benefits at some point. To best prepare for any future uncertainty, consider investing in Roth IRAs. They are tax free if you comply with the rules. Also, adopt other good principals like living within your means, reducing debt, and saving regularly so you’ll be less impacted by the next economic slowdown if/when it happens.
While there may be political divide, uncertainty, deficits, impeachment talk (the list goes on,) we still need to remember we are lucky to have the quality of life that many in other parts of the world can only imagine. I’d say the glass is half full!