How much can one afford to spend before they become broke and destitute? It appears our country is trying to discover this right now. Biden is unveiling another massive $2 Trillion spending bill, this time aimed at infrastructure, housing, education, and broadband spending. And this is on top of last year’s budget breaker of a year.
- 2020 US Government Spending: $6.5 Trillion
- 2020 US Government Federal Tax Revenue: $3.5 Trillion
We spent about twice what we made last year as a country. Spending double what you make is typically not great for a budget. And now we’re likely going to overspend again in 2021 (click below for up-to-date figures), although not for a crisis, that was last year’s $4 Trillion.
Let’s just say for the sake of argument this will be a great investment into our country’s future and pay us back well more than we’re going to spend. Who will make the payments on that extra debt?
Biden plans to raise taxes to pay for the extra debt load. A lower than average tax rate on top earners and corporations is being used as the rationale. Here are some of the details (sorry, probably too much detail) talked about during Biden’s campaign:
- Increase the corporate tax rate from 21% to 28%
- Increase taxes on those earning more than $400,000 by: 1) Reinstating the 39.6% tax bracket. 2) Phasing out the Qualified Business Income deduction 3) Imposing Social Security payroll taxes.
- Repeal the reduced capital gains and qualified dividends tax rate for taxpayers making over $1 million per year. Their gains would be taxed at the 39.6% tax rate (plus the 3.8% NIIT rate).
- Further limit itemized deductions by placing a cap on the tax benefit that can be received to 28% and reinstating the pre-TCJA overall limit on itemized deductions
- Repeal the step-up in basis for inherited properties
Why does this matter?
Many of our clients will be unaffected by the tax increase, so most won’t have to worry about that. But all of us will own the ever-increasing level of debt that is being taken on. The debt, now at $28 Trillion and growing, is a risk to our future. We imagine much of the pain will be felt by younger generations in the years to come.
At the end of the day, the heavy spending in 2020 was likely a necessity to kickstart the economy and avoid another economic crisis. We’re hard-pressed to say the same for this infrastructure bill. We expect to see higher taxes as a trending topic in the coming years. For the clients that are affected by this, we work with accountants and attorneys to find ways to strategize and reduce the impact.
If you have concerns, make sure to set aside time to give us a call. We’re here to do the worrying for you!