National Debt and Fiscal Deficits are Dire and Critical

Posted on October 22, 2024 by Edward Brownlee

The current U.S. National Debt is over $35 trillion and growing.

To pay for annual fiscal budget deficit, the federal government borrows money by selling Treasury bonds, bills, and other securities. The national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities.

U.S. Annual Federal Tax revenue or receipts are approximately $5 trillion.

U.S. federal tax revenue is made up of the total tax receipts received by the government each year. Most of it is paid either through income taxes or payroll taxes. The rest is made up of estate taxes, excise and customs duties, and interest on the Federal Reserve’s holdings of U.S. Treasuries.

The U.S. government estimates its total revenue to be $5.49 trillion for fiscal year 2025.

Per the White House’s projections, income taxes are slated to contribute $2.6 trillion. Another $2.2 trillion should come from payroll taxes. This includes $1.3 trillion for Social Security, $399 billion for Medicare, and $56 billion for unemployment insurance. Corporate taxes would add another $467 billion.

U.S. Annual Fiscal Deficit is running approximately $2 trillion.

A fiscal deficit occurs when the federal government’s spending exceeds its revenues. The federal government has spent $1.83 trillion more than it has collected in fiscal year (FY) 2024.

To pay for government programs while operating under a deficit, the federal government borrows money by selling U.S. Treasury bonds, bills, and other securities. The national debt is the accumulation of this borrowing along with associated interest owed to investors who purchased these securities.

National Debt to Gross Domestic Product (GDP) is currently 120%, according to St. Louis Federal Reserve.

The debt-to-GDP ratio compares a country’s sovereign debt to its total economic output for the year. Its output is measured by gross domestic product (GDP).

U.S. Government Revenue (or Tax receipts) per GDP is 29%.

How much national debt is too much and is there a tipping point at which it becomes a big problem for a country?

One way to gauge the size of a country’s national debt is to compare it with the size of its economy—the ratio of debt to GDP. (GDP serves as a measure of an economy’s overall size and health, measuring the total market value of all of a country’s goods and services produced in a given year.)

National Debt

Posted on August 19, 2024 by Edward Brownlee

The U.S.National Debt grows because the Federal government consistently spends more than it collects in revenue. This persistent gap between spending and revenue has existed for over two decades.

As of 8:40 am on August 19, 2024 (https://www.usdebtclock.org/)

Excessive fiscal spending and changes in tax policy play a significant role. Policies like the Inflation Reduction Act, the Chips Act and Obama Care, impact government spending, extensions of tax cuts and new tax legislation, like the Tax Cuts and Jobs Act of 2017, impact government revenues.

Essentially, new federal spending without offset taxes to pay for it and tax cut without correlated cuts in spending are the root causes of increasing deficit spending and skyrocketing National Debt

Lawmakers must focus on long-term fiscal sustainability. Delaying action will make addressing the debt even harder. A gradual, spending-focused approach is essential, including reforms to mandatory programs like Social Security and Medicare.

Tax increases must be part of the solution, and policymakers should prioritize less distortionary taxes (such as consumption taxes) or tax reforms that broaden the tax base. For instance, returning to Clinton-era policies could bring more working families back onto the tax rolls.

In summary, addressing the debt requires a balanced approach, thoughtful policies, and a commitment to fiscal responsibility.

References:

https://econofact.org/addressing-rising-us-debt

Carried Interest Lower Tax Rate

Posted on June 17, 2024 by Edward Brownlee

Carried interest is a share of profits from a private equity, venture capital, or hedge fund paid as incentive compensation to the fund’s general partner.

Carried interest typically is only paid if a fund achieves a specified minimum return.

In most cases, carried interest is considered a return on investment and taxed as a capital gain rather than ordinary income, usually at a lower rate.

Because carried interest is typically distributed after a period of years, it defers taxes in the manner of an unrealized capital gains.

Carried interest on investments held longer than three years is subject to a long-term capital gains tax with a top rate of 20%, compared with the 37% top rate on ordinary income.

Critics argue taxing carried interest as long-term capital gains allows some of the richest Americans to unfairly defer and lower taxes on the bulk of their income.

Defenders of the status quo contend the tax code’s treatment of carried interest is comparable to its handling of “sweat equity” business investments.

Source: https://www.investopedia.com/terms/c/carriedinterest.asp

Five Tax Strategies

Posted on December 24, 2023 by Edward Brownlee

Five tax-aware strategies that could help you discover opportunities to save on taxes.

At the end of the calendar year, if you take the time now to learn the tax rules, you may discover opportunities to help save on your taxes.

Here are five tax-aware strategies to consider now.

1. Make charitable donations now to get a 2023 tax deduction or consider “bunching” gifts to climb over the standard deduction.

Do you itemize your taxes? If yes, you may be able to reduce your taxable income through charitable deductions if you are eligible. Let’s dig into the rules.

For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. But what if you are very close—but not touching—the standard deduction? There is a strategy you can consider: bunching your 2023 and 2024 charitable donations together in 2023 to climb above the standard deduction.

2. Harvest your investment losses.

While you are reviewing your portfolio, consider if your current asset allocations still align with your long-term goals. If you discover losses in a taxable account, you could use those losses to offset any realized capital gains for 2023. If appropriate, you can always repurchase the investments, but be sure to do it at a later date and avoid the wash sale rule.

To set this strategy into motion, tally up your potential losses, then sell out of losing positions that no longer make sense to hold. You can use those losses to offset any realized capital gains. If you still have losses left over, you can offset up to $3,000 of ordinary income annually and carry forward any remaining losses to be utilized in subsequent years.

3. Be strategic with your annual exclusion gifts.

Annual exclusion gifting is a common way to help your estate pass on assets tax-free.

Here are the basics: You can give any number of people up to $17,000 in 2023 without triggering a taxable gift, according to the IRS. That number climbs to $34,000 for married couples. The IRS calls these amounts the “annual gift tax exclusion,” which simply means if you give that amount or less you generally don’t need to report it to the IRS. But be aware that a married couple “gift splitting” does require the filing of a Gift Tax Return (709), regardless of the amount.

4. Review your investment location with an eye toward taxes.

In investing, “location” can matter when it comes to taxes. For example, there are different tax implications depending on which types of investment accounts you choose.

With a taxable brokerage account, you are taxed on interest, dividends, capital gains, or distributions from mutual funds as they occur.

In a tax-deferred retirement account, like an individual retirement account (IRA) or 401(k), you’ll generally pay taxes when you eventually withdraw the assets.
In a Roth IRA, earnings and distributions are tax-free as long as you are over age 59 ½ and the account is at least five years old.

Depending on your long-term investment goals and investment preferences, you could benefit from a tax standpoint by investing in more actively-managed mutual funds in your retirement accounts and by investing in exchange traded funds (ETFs)—which are generally more tax-efficient because they tend not to distribute a lot of capital gains—in your taxable account.

Consider this: There’s a saying: Don’t let the tax tail wag the investment dog. While this move may be right for you, it reminds us not to make moves to minimize taxes in your portfolio unless it aligns with your long-term investment strategy.

5. Contribute to or max out your retirement plan if you are able.

Contributing to a retirement account can lower adjusted gross income and taxable income. In 2023, the 401(k) contribution limit stands at $22,500, and if you are 50 or older, you can save an additional $7,500 in catch-up contributions for a total of $30,000. The IRA contribution limit totals $6,500 in 2023, with a catch-up contribution of an additional $1,000 for those 50 or over. And if your plan allows and you believe your income tax rates may be higher in retirement, you may also want to consider the Roth option. It doesn’t have to be one or the other—you can make contributions to both as long as the total contribution does not exceed the overall contribution limit. Be aware, however, that Roth accounts are funded with after-tax dollars, so those contributions won’t lower AGI.

Get started now.

As you review your financial picture, consider these five ideas to help you prepare your way to a successful tax season.

References:

https://www.schwab.com/learn/story/pickleball-and-taxes-end-year-with-smash

Taxing Unrealized Capital Gains

Posted on January 22, 2023 by admin

For U.S. companies that report over US$1 billion in profits to shareholders, the Inflation Reduction Act implements a 15% corporate alternative minimum tax (CAMT) based on book income.

A 15% corporate alternative minimum tax for a corporation whose financial statement income exceeds $1 billion was included in the Inflation Reduction Act in 2022. Since the passage of the law, there has been uncertainty about whether corporations would owe taxes on paper profits, or unrealized capital gains, on stocks starting in 2022.

The new tax will require companies to compute two separate calculations for federal income tax purposes and pay the greater of the new minimum tax or their regular tax liability. To determine whether the new tax applies, companies must first ascertain whether their “average annual adjusted financial statement income” (AFSI) exceeds $1 billion for any three consecutive years preceding the tax year.

The historic tax treatment has long been that paper profits (or unrealized capital gains) created a deferred tax liability that is only paid when the stocks or assets are sold, and the profits realized.

Recent guidance from the Internal Revenue Service, while not definitive, suggests that paper profits on stocks could be subject to a 15% tax this year, according to New York tax expert Robert Willens. The issue involves the tax treatment of applicable financial statement income (AFSI), a measure of earnings.

“The IRS left open the question of whether ‘mark to market’ gains and losses should be disregarded when computing AFSI,” Willens wrote to Barron’s. “As of now, they are included in AFSI. The IRS solicited the comments of investors as to whether these gains and losses should be backed out of AFSI or whether they should remain in the tax base.”

The beauty of the previous tax rules is that a company could defer the taxes indefinitely on unrealized gains in long-held stocks, especially when the preferred holding period is “forever.”

Individuals can defer capital-gains taxes until the sale of assets and can often avoid taxes entirely if the assets are left in their estates, assuming the estates are below the current threshold for inheritance taxes.

There have been proposals floated in Congress from some lawmakers to tax unrealized gains held by individuals, but they haven’t gained traction.

References:

Minimum Book Corporate Income Tax

Posted on October 16, 2022 by admin

Book income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax. ~ Tax Foundation

In August, President Biden signed a minimum book income tax into law under the 2022 Inflation Reduction Act. The law was passed in both chambers of congress by Democrats.

Book income is the amount of income corporations publicly report on their financial statements to shareholders, explains the Tax Foundation.

The appeal of the minimum book tax for Democrats is two-fold, explains Laura Davison, in an article written for Bloomberg.com.

First, the minimum tax goes after corporations that many Democrats say don’t pay enough in taxes.
Second, it’s a way to raise taxes on corporations without increasing the 21% headline tax rate.

Senator Joe Manchin, Democrat (WV), says the minimum tax doesn’t so much raise taxes as close a loophole — even though it would mean that some corporations have to pay more to the federal government.

The law enforces a 15% corporate minimum tax targeted at companies that earn more than $1 billion a year. President Joe Biden cited a report in his State of the Union address that found that 55 companies paid no federal income taxes in 2020, despite earning profits under the standards of GAAP.

The corporate minimum tax would require companies with at least $1 billion in income to calculate their annual tax liability two ways:

One using longstanding tax accounting methods, which is 21% of profits less deductions and credits;
The other by applying the 15% rate to the earnings they report to shareholders on their financial statements, commonly known as book income.

Whichever amount is greater would be what they owe to the IRS.

A corporation’s profits for tax purposes and for financial reporting to shareholders often vary. Book income sticks more closely to generally accepted accounting principles, or GAAP, while the Internal Revenue Service code includes a slew of deductions and credits that companies can use to offset their income.

This roundabout method to collect more money from corporations provides much of the new revenue to fund the energy investments and deficit reduction that Democrats are hoping to tout in the midterm elections this November.

References:

Inflation: A Hidden Tax

Posted on September 22, 2022 by admin

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. Its a “hidden tax” on your money.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets.

Conversely, the same American’s paycheck covers less monthly goods, services, bills and debt payments. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power, concludes the nonpartisan Tax Foundation.

Simply, inflation occurs when there is more money for the same amount of real goods and services, which forces an increase in prices.

The way this occurs is when policymakers put more money into the economy, through either deficit-financed government spending or Federal Reserve loose monetary action, both actions can result in an increase in the money supply of an economy.

A Hidden Tax.

This means that if any other type of tax has to be levied on the general population, it must be introduced in and approved by Congress or legislatures. However, this is not the case with the “hidden tax” of inflation.

Inflation tax is not an actual statuary tax paid to a government; instead “inflation tax” refers to the penalty incurred to purchasing power for the money you’re holding at a time of high inflation.

“Inflation is the one form of taxation that can be imposed without legislation.” ~ Milton Friedman

Inflation is an extremely destructive hidden tax, especially on working families. Inflation reduces the buying power of money. Put simply, high inflation means your money is not stretching as far as it once did. As prices rises, it is felt because wages and benefits are not rising in equal measures.

References:

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

Will Higher Interest Rates Tame Inflation?

Posted on September 21, 2022 by admin

Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation. At this point, there are over $5 trillion in excess money in the system. Brian Wesbury

While inflation roars at its highest level in four decades, President Joe Biden tried to downplay skyrocketing inflation, insisting it was only up “just an inch” in the short term.

“Well, first of all, let’s put this in perspective. Inflation rate month to month was just– just an inch, hardly at all,” President Joe Biden on Sixty Minutes

Despite the fact that consumer prices rose in August by one-tenth of a percentage point to 8.3 percent, economists had expected inflation to go down. Additionally, median inflation hit the highest level ever recorded.

The median CPI, which excludes all the large changes in either direction and is better predicted by labor market slack, is extremely ugly at 9.2% annual rate in August, the single highest monthly print in their dataset which starts in 1983 (second highest was in June).

The Federal Reserve has been raising interest rates since March to slow the economy in a bid to tame America’s worst bout of inflation in four decades. However, the data suggested that their efforts have not yet had much of an effect.

The Federal Reserve raising interest rates may reduce economic growth, make capital more expensive and may throw the US economy into recession, however there is no guarantee that these actions will tame or fix inflation, opines Brian Wesbury, Chief Economist, First Trust Advisors L. P. Interest rates, supply disruptions or Russian’s war in Ukraine don’t determine inflation; the amount of money circulating in the economy determines inflation.

“Inflation is always and everywhere a monetary phenomenon.” ~ Milton Friedman

The Fed’s balance sheet held $850 billion in reserves at the end of 2007. Today, the balance sheet is close to $9 trillion. Most of these deposits at the Fed are bank reserves which the Fed created by buying Treasury bonds, much of which was money the Treasury itself handed out during the pandemic. At this point, there are over $5 trillion in excess money in the system.

Technically, banks can do whatever they want with these reserves as long as they meet the capital and liquidity ratio requirements set by regulators.

They can hold them at the Fed and get the interest rate the Fed sets, or
They can lend them out at current market interest rates.

In turn, the big question is whether the Fed can pay banks enough to stop them from lending in the private marketplace and multiplying the money supply.

The Fed has never tried to stop bank lending in an inflationary environment by just raising the interest rate on excess reserves (IOER). Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

Taxing Unrealized Gains: A Politically Dum Ideal

Posted on September 9, 2022 by admin

“Honestly, I [Mark Cuban] don’t think Elizabeth Warren knows that’s all what she’s talking about when she deals with this. I think she just likes to demonize people that are wealthy, and that’s fine, it’s a great political move for her, but I just don’t think that they really understand the implications of taxing unrealized gains.” ~ Mark Cuban

U.S. Senator Ron Wyden, D-Oregon., has proposed a so-called mark-to-market version of the capital gains tax. Put more simply, investors would pay capital gains taxes each and every year in which their assets go up in value, instead of only when they are sold.

Additionally, President Joe Biden wants to introduce a new tax that targets the wealthiest families in the country. It’s called the Billionaire Minimum Income Tax—except that it doesn’t only tax billionaires, it isn’t a minimum tax, and it’s not really a tax on “income” either. But it is a tax . . . so at least they got that part right!

A wealth tax would apply to assets traded in liquid markets, like stocks and bonds, and to illiquid assets like real estate, private companies and complex investments.

This tax on unrealized gains would be not only difficult to implement but also could devastate markets, especially liquid markets, where stocks, bonds and commodities trade.

The annual tax would also apply to illiquid investments like the value of a private company, real estate and other complex investments.

This means that every year, these assets need to be revalued to determine if their worth went up or down (you can write off the estimated loss if the value of the company, or real estate, if realized), but this means annual appraisals for essentially every investment you own.

Unrealized Capital Gains

Capital gains—which are profits (or potential profits) from an investment that goes up in value after you buy it—can either be realized or unrealized.

Unrealized capital gains show you how much your investment has increased in value before you sell it. Once you sell an investment for a profit, you now have realized capital gains.

The difference is that unrealized gains are only on paper—they’re not really real —while realized gains represent real money that’s in your pocket.

Whenever a stock or investment you own is worth more than what you bought it for, you can sell it for a profit—and those profits are called capital gains.

If you decide to hold on to the stock and not sell it, then what you have are unrealized capital gains. After all, you can’t just walk up to your grocery store cashier and pay for milk and eggs with your stock—no matter how much it’s worth on paper.

Problems With an Unrealized Capital Gains Tax

There are three significant reasons why any proposal to make this a reality probably won’t make it too far.

1. A new unrealized capital gains tax would be a headache to enforce.

For a tax like this to work, thousands of taxpayers would need to evaluate the value of all of their assets every single year. That raises the question: How in the world would the IRS—which is already understaffed and overburdened as it is—be able to audit all those filings?3

2. The proposed tax probably doesn’t have enough support in Congress.

“wealth tax” proposals have hit a brick wall on Capital Hill every time it has been proposed. It doesn’t look like this one is any different.

It’s important to remember, Congress treats the release of the budget from the White House more like a list of suggestions than something that’s written in stone.

3. A tax on unrealized capital gains might be unconstitutional.

It may be ok legal to tax unrealized capital gains. The Constitution makes it extremely tough for the government to impose direct taxes. In fact, Congress had to pass a constitutional amendment just to put a federal income tax in place.6

Basically, any tax that is passed must be spread evenly among every person in every state. And a tax on unrealized capital gains could be considered a direct tax because it’s a tax on the personal property of a select group of people.

References:

Taxes are Your Largest Expense

Posted on August 2, 2022 by admin

“Taxes are your largest single expense.” ~ Robert Kiyosaki

Total taxes are by far and away the largest expense that most households face on an annual basis. Total taxes are levied on income, payroll, Social Security, Medicare, property, real estate, sales, alcohol, gasoline, capital gains, dividends, imports, estates and gifts, as well as various other fees such as vehicle tags and driver license. It’s important for Americans to understand that income taxes, sales, Social Security and a myriad of other taxes and fees dramatically reduce your discretionary net income.

The average American household spends anywhere between 25-50 percent of their life working just to pay the diversity of taxes. That means that more than three to six months out of every year are spent working solely to pay your local, state and federal taxes and fees.

Effectively, all levels of government in the U.S. (federal, state, county, city/local) confiscate nearly half of the average household’s income every year, and yet they still cannot balance the national budget and always seem to need more money.

How much is enough when nearly half of the productive effort of the nation is taxed and used unproductively.

Your total tax rate, the one which actually matters the most to you includes more than just income. And these insidious taxes grow in size and quantity every year.

Total taxes are by far the single largest expense that you will pay every year. And, you can’t escape taxes, so the best thing you can do is learn how to better manage your taxes burden and understand how federal , state and local tax laws and regulations can work in your favor.

References:

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Tag Archives: Taxes

National Debt and Fiscal Deficits are Dire and Critical

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National Debt

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Carried Interest Lower Tax Rate

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Five Tax Strategies

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Taxing Unrealized Capital Gains

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Minimum Book Corporate Income Tax

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Inflation: A Hidden Tax

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Will Higher Interest Rates Tame Inflation?

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Taxing Unrealized Gains: A Politically Dum Ideal

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Taxes are Your Largest Expense

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