Ep. 7 | Will Future Federal Tax Rates Be Increasing?
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Speaker 2:Welcome everybody back to teaching tax flow, the podcast. Now we're on episode seven, lucky number seven. The topic for today is something that I'm sure a lot of people are wondering about. There's a lot of certainties and uncertainties kinda rolled into this, but nobody that I can think of would be better to answer this than the guy to my right is always Chris Pacquero, CPA. How are you doing, Chris?
Speaker 3:I am wonderful, John, and you didn't introduce yourself.
Speaker 2:Well
Speaker 3:Johnny t in the place to be, John Schapolski.
Speaker 2:It's got a nice ring. And maybe we'll flip this up a little bit. Maybe you can introduce me next time. You know, we'll sing a little song. We'll add we'll add a little pizzazz to some pretty significant numbers.
Speaker 2:I I think we're gonna toss out today. So back back to that topic, you know, will we see or can we expect right? I know we expect it, but regarding the federal tax rates. Right? So will the federal tax rates be increasing in the future?
Speaker 2:So, Chris, I'm gonna throw this over to you and kind of walk us through, basically, are we gonna see this? And also really kinda dip and dodge a little bit into, you know, what what's likely gonna be the cause of any changes that we may see regarding the fed tax rate? In before we decided to
Speaker 3:do this podcast, I had always heard that that, yes, the the federal government's in debt. The debt's increasing. It's an issue. The sentiment is is that federal tax rates need to increase. But I never really dove into the numbers until we did our little show prep, for this.
Speaker 3:Which was shocking. I remember you were writing that, And if I
Speaker 2:remember correctly, you had me kind of double check your math because we we weren't a % sure of it. So walk us through that. What what actually is the the current estimated debt.
Speaker 3:Exactly. Because I wasn't sure that my calculator would go into the trillions.
Speaker 2:We were counting a lot of zeros. That's for sure.
Speaker 3:But that being said, as of the taping of this podcast, the federal government, the United States federal government, is $31,200,000,000,000 in debt. That's with a t. We looked at the financial statements with the for the fiscal year ended in 2021. That'd be September 2020 to October 2021. This information is available on the US Treasury website.
Speaker 3:This is all public information. And the the income was about 3.8 to 3,900,000,000,000.0 for the federal government. The expenses were about 4,800,000,000,000.0. It doesn't take a rocket scientist or CPA to determine that we are just a little under a $1,000,000,000 net loss for the year, $966,000,000,000 yearly deficit. So that 31,200,000,000,000.0 I'm sorry.
Speaker 3:About $1,000,000,000,000 deficit, $966,000,000,000 of loss. So expenses exceed revenue. So that $31,200,000,000,000 number is set to increase almost a trillion dollars per year based on these numbers.
Speaker 2:And then as we were calculating this too, so based off of current US population numbers, we'll we'll call it you know, we won't call it an estimate. We'll call we'll call the number we have. So based off of that, I remember running through running through this calculator looking at it. So per head of current US residents, what's that number broken down per individual?
Speaker 3:Exactly. And, obviously, the population changes daily. But at the time of this recording, somewhere we are in debt somewhere between 85,000 and $95,000 per resident of The United States, and we know that not every resident works. So if you think about how much someone is consuming as far as government services and for the dollar amount on that versus how much they're contributing based on federal tax that they're paying and the fact that we have a lot of retirees, we have a lot of younger people that aren't yet in the workforce, babies, children. You only have a sliver of the population that's actually contributing to the revenues based in general based on tax.
Speaker 2:And what's shocking to me, obviously, not being not being in your office every day and and crunching these numbers, but and not knowing what exactly even at at the time of this, not knowing what the the median, you know, individual annual income is, I mean, that's pretty significant. I mean, that that's more I mean, that's that's, you know, an x multiplier of how much somebody's even making in a year pretax, which is shocking.
Speaker 3:So about 85 and a half percent of the federal government's revenue based on the fiscal year end 2021 was made up of payroll taxes and income tax. That was about $3,300,000,000,000 out of the 3,863,000,000,000.000. Now when we say trillions, billions, that to me, that always is confusing. So I like percentages. So almost 85 and a half percent of the money coming in is based on income tax and payroll tax.
Speaker 3:So that being considered, what what what the trend that we see and if we looked at the federal government as a business, this business would be bankrupt.
Speaker 2:Mhmm. A while ago. So, really, what do you as a business, if you're trying to increase your bottom line, increasing your revenue, right, you find other ways, legal and ethical ways, we should say a little bit, to increase that revenue. So I'm gonna I'm gonna go on a limb and make the assumption from myself that taxes are going to increase moving forward. Is that correct?
Speaker 2:That's a
Speaker 3:that's the sentiment and that's a good assumption. The question that we we we're not sure, and we could do a lot get a lot of our research on taxfoundation.org, which is an which is a nonprofit organization that provides a lot of research. Lowering tax rates doesn't necessarily mean that less tax revenue will come in. And that's where it's not our job. That's where the the senate finance committee, the house ways and means committee, that's where the federal government's working to try to figure out what's the best way to increase revenue.
Speaker 3:Now you men you mentioned where are we right now? As we know in 2017, the Tax Cuts and Jobs Act was passed. That Tax Cuts and Jobs Act significantly reduced taxes paid by many people in corporations. That tax cuts and jobs act is set to expire on 12/31/2025. So we and in 2026, tax rates in brackets are going to be higher than they are now.
Speaker 3:They're gonna revert back to pretax custom jobs act, brackets. Again, we teach understanding your marginal tax rate more important than a tax bracket. But the point is here, we have we're we're here at the end of 2022. We've got '23, '20 we got three more years where we're in relatively lower tax rate environment. Again, that doesn't mean that there'll be less tax revenue generated because if you have assets that are pretax and you know tax rates are gonna go up, you might recognize the taxable income.
Speaker 3:And that's really when we talk about teaching tax flow, the red diagnosis is very powerful. You know on the purple diagnosis, tax deferral is one that I think is way overused, and the most underused is the gold diagnosis. And that's why gold tax free income and growth is so valuable because we already know just by the the expiration of the Tax Cuts and Jobs Act that tax rates are gonna go back up.
Speaker 2:And I know too we we were chatting about this, I I wanna say, a couple days ago or possibly even before that. There was a great survey that was done, and I don't recall exactly what it was. I'll let you dive into that. But before we do, so as far as for people's overall feelings, right, on on, you know, the increase of taxes, it you know, kinda going back to something we talk about all the time and really the basis of teaching tax law, right, is planning for something. So I'm sure this isn't the first time that that our listeners and our members have heard, oh, you know, taxes might go up.
Speaker 2:This is gonna be a big change. It's I mean, the good thing is again, this this is my opinion and kind of how I'm taking it is we have a number of years to do this. The worst thing you can do is just kinda put it off and say, oh, I'll deal it with it later. This is really a great time. You're not saying today or yesterday or whenever, but ASAP is start to plan for this a little bit.
Speaker 2:So even though we might not know exactly what it's gonna be in '25, '20 '6, or or what year you had mentioned, plan for it.
Speaker 3:Right? Exactly. And and as tax planners, we can only plan on what we know. And we know what the when the tax cuts and jobs act expires, common sense tells us that tax rates will most likely increase in the future. Now will will that increase the amount of tax revenue?
Speaker 3:It's really it's unknown. There's no a lot of times, lower tax rates may actually make create higher tax revenues. It's a it's an odd thing, but I want you to think about, you know, how much if something if if a consumable is less money and and prices are a little lower, you might buy more things from that store. The other thing to consider when we're talking about, and this is why understanding your marginal tax rate is so important compared to your tax bracket. We just said that 85 and a half percent of the of the revenue that the federal government receives is from payroll taxes and federal income tax.
Speaker 3:Well, it's very easy and what I can see happening is that Social Security wage base, which an employee pays half of and employer pays the other half of, continues to increase because your the message is gonna be we didn't we didn't increase your federal tax, but you definitely increased your Social Security tax, which is a and it all goes into the same same bucket. So that's something to be very concerned about. And as a taxpayer, understand and I hate to keep beating this dead horse. Your marginal tax rate understand and one of the things we teach teaching tax flow is that not all income is taxed the same. There are different tax rates for different types of income.
Speaker 3:And because the sentiment is that tax rates are gonna increase significantly after the Tax Cuts and Jobs Act expires in in at the end of twenty five, that gold strategy that we talked about tax free income and growth is so important. Mhmm.
Speaker 2:So really planning for this obviously is key. So that's let's actually jump into it, and I know you probably got this all off the top of your head. I can't remember actually who did it. But that survey that we referenced a while back, it was it was really interesting. If I remember too as we were scrolling through it, it was very transparent.
Speaker 2:Right? So on what these results were, the sample size that they did the did the survey on. Walk us through that a little bit if, you know, any of the the key pieces of that that you recall that stood out to you.
Speaker 3:Right. And and this was so this came from or a survey earlier this year from wallethub.com. We're gonna post the survey results in the show notes. Okay? So but I'm gonna couple of things that really stuck out to me when we're talking about, public sentiment.
Speaker 3:And remember that the people that make the tax laws, write the tax laws, are voted in by the residents of The United States. So we I think if we look at some of these results so to give you an example, one of the questions was even in the tax cuts and jobs act of 2017 environment, which is the lowest I've been practicing for over twenty years, these are the lowest tax rates we've ever seen. In my opinion, at this point, these are probably the lowest tax rates I'll ever see in the rest for the rest of my career. That being said, 67% of people, but tech current tax rates, individual tax rates are too high. Two thirds of people think they're too high.
Speaker 2:And do you think, Chris, that that's it kinda leads a little bit to that they they possibly don't understand your marginal tax rate versus your tax bracket?
Speaker 3:I do. I think and they I don't think that they understand that different types of incomes are taxed taxed differently.
Speaker 2:And really as an individual well, really, and as a business too, but mainly as an individual, you really do have full control to a within limitations, but of how much you actually pay in taxes.
Speaker 3:Exactly. If if you don't remember, we talked about the taxing agencies are involuntary business partner, and you have to you don't do the proper tax planning. Even if you are a w two person, there's some tax planning that can be done. It's not just for real estate investors and entrepreneurs or or business owners. So on the corporate tax side, 62% of people thought corporate tax rates were too high.
Speaker 3:And corporate tax rates, in general, are very, very low right now. There was, and I won't get into the nitty gritty, but the first few first bit of income, those tax rates went up, but but the corporate tax rates, in general, flat 21% on the federal tax side. This really one thing because we think tax rates are gonna go up, this ties into one of our red diagnosis, which is residency planning. And as someone that relocated to a to a state that has no income tax, I found this interesting. The question was posed, would you move to a different state to avoid tax?
Speaker 2:And I'm sure a lot of people think about that. I mean, we're we're obviously down in in Florida a lot together working on some projects. Obviously, you live in Tennessee. I've lived in multiple states. So you see that variation really across the country.
Speaker 2:Right? So but I do know, not getting into the weeds at all, that certain states may have, you know, minimal or nonexistent, we'll say state income tax, but there's likely some other taxes, say, as an entrepreneur. Like, perfect example, an LLC in Tennessee, I believe, is one example that you, you had mentioned. Right? So excuse me.
Speaker 2:Oh, it's okay.
Speaker 3:That's right.
Speaker 2:It must be it must be a hard answer.
Speaker 3:Man, I I you you you you threw that LLC out again. You know how much I really love that.
Speaker 2:You know, and if you guys if you guys want a really good laugh, go go back and listen to that episode. That was probably one of the more fun ones that we've done. I thought you may I I really thought you were gonna throw something at me. That that was that was one of the one of the on the whim ones. But Right.
Speaker 3:Obviously, states are gonna generate revenue some way, shape, or form. This this podcast is not to is not about, state tax in general, but you can see that this the growing states typically don't have a state income tax. They might have a higher sales tax or consumption tax. They might have a a tourist tax, and you can see where the population movement is. So I'm just gonna leave that there for now.
Speaker 3:But the answer to the question was 50% said yes. They would move to a different state just to avoid taxes. That's that's significant. Half of the people would do that. So
Speaker 2:Not taking into account that it's expensive to move.
Speaker 3:So It can be expensive to move, but it's sometimes expensive to stay. Yeah. We had a, we had a client that was a California client, significant amount of income. They paid more California tax than federal tax. And, it's quite quite interesting.
Speaker 3:So, the other thing is in the and and again, these surveys are usually aren't people waving the waving the flag for the the United States government. But the final question we're gonna talk about as we wrap things up here is does the government currently spend your tax dollars wisely? 81% of people said no.
Speaker 2:Wow. That's a that's a big percentage. It's a and, again, it's I I don't remember exactly what the the sample demographics were on the specific, but, I mean, given that it was a a reputable source, I'm sure they weren't, you know, asking all the same people at a at a grocery store. Right?
Speaker 3:So exactly. This is you know? And, again, you'll see this on the show notes. But the point is here, what what do we know? We know that the government's in significant debt.
Speaker 3:We know that the debt continues to grow, and we know that the Tax Cuts and Jobs Act expires at the end of twenty twenty five. We don't know what tax rates will be after that. The sentiment is they're going to be higher. So make sure you understand you and that you have a good mix of tax strategies. And no matter if you are a red, green, or purple, no matter what your marginal tax rate is, you should be implementing, in my opinion, some gold tax free income and growth diagnosis prescription.
Speaker 3:So to learn more about that, please check us out on social media. Go to teachingtaxflow.com. We we provide a lot of content. We provide a lot of education at in this podcast, in this platform is for the people. We appreciate your open mindedness.
Speaker 3:We appreciate your time. We also appreciate a five star review. And please rate, review, and subscribe this podcast. So, Johnny t, you wanna take us home? Yeah.
Speaker 2:Yeah. Let's do it. Well, you know, I don't have a oh, no. I was gonna I was gonna turn around and say I don't have a driver's license to do that, but that's definitely not true. But thank you, Chris, for diving into it into this with us.
Speaker 2:I mean, a lot of this, I think, is, you know, again, making an assumption. A lot of us have heard that this is going to happen. But I I really like this episode, Chris, specifically, because I think you did a really great job of taking a lot of information, condensing it down, and really reiterating. Right? Like, we know it's going to happen.
Speaker 2:We don't know exactly what it's gonna be, but we know it's gonna be significant. You know, if people have certain feelings today, it's like you know, they're expecting that change. And this probably is going to be one of the one of the episodes that we have the most forethought into. Right? Like, we're looking years down the road, not just next year.
Speaker 3:Absolutely. And then one more thing I want to add. Let's have a little fun. We wanna know your opinion. So when you see this episode, please comment on it, share it.
Speaker 3:I'd love to hear what the sentiment is. I want to know if our listeners share the sentiment of this WalletHub survey. Thank you so much for listening and have an amazing rest of the day.
