Financial PlanningTaxesDeficit Projections Could Signal Higher Taxes

The federal government recently released a report on the nation’s finances, including longer-term projections for a rising deficit, which could mean higher taxes in the future.

 

On a positive note, the Congressional Budget Office (CBO) report reflects a current decrease in the annual budget deficit for the last fiscal year. The easing of the deficit is primarily due to historic spending related to the pandemic winding down. The longer-term outlook is more challenging, with projected annual budget deficits exceeding 6% of GDP by 2032 — much higher than the average of 3.5% of GDP over the past 50 years.

From a financial planning perspective, the analysis can offer a glimpse of future policy that could impact tax rates and spending.

Here are some key takeaways from the report.

1. Total federal debt is the highest since post-WWII.

Total federal debt (held by the public) is poised to exceed 100% of GDP for the first time since shortly after World War II and is expected to continue rising over the next 10 years.*

Federal debt held by the public

(% of GDP)

percentage of debt held by government to GDP

Source: Congressional Budget Office, The 2022 Long-Term Budget Outlook, May 2022. Does not include intragovernmental debt.

*The debt held by the public is all federal debt held by individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government. It does not include intragovernmental debt, which is debt that one part of the government owes to another part, such as Social Security trust funds.

2. Although federal revenues increased in 2021, there is still a significant gap as spending increased as well.

Revenues increased by over $600 billion from 2020 to 2021 (an increase of 15%). While deeper analysis is required, one of the drivers seems to be investors selling appreciated assets to realize gains as talks in Congress focused on increasing tax rates in 2022. For 2021 revenues totaled 20% of GDP, significantly higher than the long-term average of roughly 17%. However, federal spending was also historically high, exceeding 24% of GDP.

3. An older population, increased health care costs, and rising interest rates are key drivers of the federal budget deficit.

In fact, 70% of federal spending is devoted to mandatory spending programs, the three largest components being Social Security ($1.1 trillion), Medicare ($868 billion), and Medicaid ($521 billion). As the population ages, this trend will continue. Federal spending for mandatory programs generally requires legislative action to change its trajectory, unlike discretionary spending, which can be addressed through the annual budget appropriations process. Lastly, interest payments on the existing debt are projected to more than double over the next 10 years.

U.S. federal government spending by type

(2021 fiscal year)federal spending by type

Source: Congressional Budget Office, The Budget and Economic Outlook: 2022 to 2032. May 2022.

Mandatory spending types primarily include Social Security, Medicare, and Medicaid. Discretionary spending includes defense and non-defense items. “Other” mandatory items include certain veteran’s benefits, retirement benefits for federal employees, Supplemental Nutrition Assistance Program (SNAP), unemployment, and other government benefits less offsetting receipts.

4. Tax payments from individuals drive an overwhelming portion of federal revenues.

Over 50% of government revenue comes from income taxes, while over 30% is from payroll taxes. Corporate taxes generate less than 10% of total revenues.

5. Federal gift and estate taxes are a relatively insignificant source of revenue.

In 2021 total gift and estate taxes totaled $27 billion, less than 1% of total revenue. Even after a scheduled increase in gift and estate taxes after 2025, revenue from this source is projected to increase only to $43 billion.

Consider the risk of higher taxes

Considering the dubious outlook on the federal budget situation, investors need to consider the risks of higher taxes being proposed to generate more revenue.

Tax increases could take a number of different forms including:

  • Increased ordinary income, dividend, and capital gains rates for some taxpayers
  • Additional surtaxes imposed at higher income levels or on flow-through business income
  • A sharp increase in the Social Security wage base (currently $147,000) to address the program’s solvency issues
  • Additional increases in Medicare Part B and/or D premiums for higher-income taxpayers
  • A scale-back in certain tax deductions or credits
  • Changes to the gift and estate tax laws

Taxpayers should consult with their professional advisors to mitigate these risks. Tax-smart planning could include using Roth accounts to diversify tax liabilities, funding health savings accounts, and transferring wealth if appropriate.

 

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Holly Farrar

Client Services Associate

As director of First Impressions, I strive to make sure our clients have a comfortable and meaningful experience while providing remarkable customer service at the highest standards. I enjoy going to local Everett events and festivities while spending time with friends and family. I love to read, especially dystopian novels.  I am involved in volunteering opportunities within the community including grocery shopping for homebound people, coffee trailer and first responder appreciation.

Education and Biography

Training

Holly Studied Business and Management at Sno-Isle Business and Management & Everett Community College. She has over 20 years of customer service and administrative experience.

Specialisms

Holly’s focus is to create meaningful connections between our clients and our office. She schedules appointments, answers calls, processes transactions, preparing paperwork to maintain accounts as well as opening new accounts, and transfers.

Albert Ballesteros

With over 25 years of customer service working in the Financial Industry and the State of Washington, Albert is a welcome addition to the service team. He helps with opening new accounts and servicing current accounts. You have probably received appointment reminders from him. He also works with the marketing team in planning monthly letters to clients, planning special events and creating the weekly newsletters.
In his spare time, he volunteers at Northshore Christian Church, having completed two mission trips to the Philippines and has a passion for singing. He enjoys playing and watching most sports but is especially an avid fan of the Everett Silvertips.

Education and Biography

TRAINING

Albert attended Honolulu Community College where he obtained his AA in Liberal Arts.

SPECIALISMS

Albert joined Bailey Wealth Services in 2022. His focus is to provide support to both prospective and existing customers with exceptional customer service. He is very personable and brings professionalism to his role.

Wes Burroughs

One of the things I enjoy most about what I do is educating clients on what is available to them as an investor. Our clients know where they’re at financially and where they are going because we make breaking down the complexities of a constantly changing world a top priority. Outside of work, I love spending time with my wife, Blyn, and playing with our daughter, Sophia. I also enjoy running and hosting game night with friends.

Education and Biography

TRAINING
Wes attended Liberty University where he obtained his BA in Philosophy.

SPECIALISMS
Wes joined Bailey Wealth Services in 2021. His focus is helping families maintain and grow the wealth they already have. Wes enjoys working with our valued clients to facilitate financial relationships by providing solutions, solving problems, and helping them manage their financial lives.

A. Sean Bailey, CFP®

My mission is to assist families as they strive to acquire, accumulate and retain wealth in a tax efficient manner so they may live in retirement with confidence and dignity. When I’m not engaged in professional activities, you can find me on a mountain top with my wife, Kim, and our two children, Eleanor and Oscar.

Education and Biography

TRAINING
Sean received his Bachelor’s Degree in Business Administration, Finance Concentration, from the University of Washington.

SPECIALISMS
Sean Bailey has been in the financial services industry for 30 years. He specializes in developing comprehensive financial, estate and retirement planning strategies for clients nearing and in retirement. Sean is a Registered Principal and Investment Advisor with LPL Financial. He is a CERTIFIED FINANCIAL PLANNER™ Practitioner. Sean is also a member of the Financial Planning Association and Ed Slott’s Elite IRA Advisor Group.

Ed Slott’s Elite IRA Advisor Group is not affiliated with Bailey Wealth Services or LPL Financial.

Sonya Jones

I endeavor to provide excellent service to our clients and organizing processes and procedures to ensure our office runs smoothly. When not working, I enjoy spending time with my fiancé, Erik, and our two boys, Lukas and Archer along with our dog Pixie. I love cooking for them and experimenting with different recipes and techniques, including treats for Pixie. Our favorite family activity is taking road trips, especially to California to visit family and friends.

Education and Biography

TRAINING

 

Sonya received her BA in Art at California State University, Chico and has over 25 years of administrative and customer service experience in the financial services and accounting industries.

 

SPECIALISMS

 

Sonya’s focus is to help clients reach their financial goals by assisting them with their various transactions and paperwork to service and maintain their accounts. This includes opening new accounts and initiating transfers from and to financial institutions. Sonya is constantly looking for new ways to improve our processes to ensure we work efficiently and in a manner that creatives positive experiences for our clients.

Sonya Jones

I endeavor to provide excellent service to our clients and organizing processes and procedures to ensure our office runs smoothly. When not working, I enjoy spending time with my fiancé, Erik, and our two boys, Lukas and Archer along with our dog Pixie. I love cooking for them and experimenting with different recipes and techniques, including treats for Pixie. Our favorite family activity is taking road trips, especially to California to visit family and friends.

Education and Biography

TRAINING
Sonya received her BA in Art at California State University, Chico and has over 25 years of administrative and customer service experience in the financial services and accounting industries.

SPECIALISMS
Sonya’s focus is to help clients reach their financial goals by assisting them with their various transactions and paperwork to service and maintain their accounts. This includes opening new accounts and initiating transfers from and to financial institutions. Sonya is constantly looking for new ways to improve our processes to ensure we work efficiently and in a manner that creatives positive experiences for our clients.