It’s Tax Day, so we’re going to talk about why taxes are going to go up. In a day or two, part 2 will run, which tells how to reduce your tax burden.
It doesn’t matter who is president or what party controls congress. At some point in the future, they will have to raise our taxes.
Social Security is running out of money. In a decade, Social Security benefits will have to be cut. The only way to keep that from happening is by raising the tax you pay for Social Security and Medicare.
Right now, employees have 7.65 percent withheld as FICA and the employer matches that with an equal amount, so the government gets 15.3 percent of your salary before they assess an actual income tax. People who are self-employed or are paid as a contractor and receive a 1099 have to pay the full 15.3 percent themselves.
I expect that number will have to rise, possibly closer to 9 percent. How much of your income gets assessed for FICA will also continue to expand. The limit is currently $160,200.
The government might also raise the retirement age, shifting it another two or three years. This is people in France are protesting in the streets. Change the age won’t help much in the short term because they will implement such a change slowly. In 1983, for example, they raised the full retirement age from 65 to 66 in 2009 and to 66 in 2027. People who will turn 67 in 2027 were born in 1960, meaning they were only 23 at the time the law changed. As you can imagine, most 20-somethings didn’t bother to protest because retirement was 44 years in the future.
Beyond FICA, I expect income taxes to go up because of rising deficits and higher interest rates. The government has more than $30 trillion in debt on which it is paying interest. Every dollar that goes to interest is one more dollar that has to be generated by taxes. When the interest rate was 2 percent, interest was $600 billion. When the interest rate is 5 percent, it will be $1.5. If inflation forces the Fed to raise rates to 10 percent, the debt payments will reach $3 trillion. (That’s more than $9,000 per U.S. resident, per year.) Now imagine what happens if we have another Paul Volker, who raised rates to 20 percent in 1981, or if we experience hyperinflation.
It may be more than banks that fail.
The government is like a household with multiple credit cards, all of them close to getting maxed out. All that money going to debt service is leaving less for living expenses and even less for paying down the principal.
Outside of letting the printing presses run and creating money out of thin air, which will cause more inflation and lead to a collapse, the only option is to raise taxes. Sure, they will target the rich and the corporations, but the best way to raise taxes is to cut some of the special credits that help low-income people avoid paying tax. The earned income tax is a good example. It gives people making less than $59,000 a credit, often resulting in them getting a big refund.
There are also tax credits on child care costs and deductions for mortgage payments that reduce people’s tax bills. One way to raise taxes would be to end those programs.
More Aggressive Audits
Expect more aggressive audits, no matter how little you make. With 80,000 new IRS agents in the pipeline, I don’t believe they will keep their word and only audit those making more than $400,000.
The government has proven itself to be very effective at making the cost of fighting an enforcement action so expensive it makes more sense to settle. So expect them to make big claims of malfeasance on your part and then offer to settle for just a fraction. Most people will jump on the settlement offer even if they would win their case in tax court.
The IRS computers are outdated, but if they can ever get AI working for them, or pay an AI company to audit returns, then the number of agents will matter even less. Given the amount of information that is collected on you, from credit card records to bank statements, it would be easy for a clever computer to find people who are living above their means. That means they could be criminals or at least tax cheats, possibly both.
More Rule Changes
A few years ago, the government made some changes to IRAs that affect how quickly you must withdraw the money if you inherit one. Why did they do this? To generate taxable income more quickly. Expect them to make other changes that puts more of your money in the government’s pocket more quickly. They won’t be called tax increases but they will increase your taxes.
Licenses, fees, and other payments will also go up. While these may not technically be taxes, the still take money out of your pocket and put it in Uncle Sam’s.
The government is going to be after your hard earned money, and because of their desperation, nothing will be off the table. Wealth tax, inheritance tax, any kind of tax you can think of. In our next post, we’ll talk abut how you can protect yourself and reduce your tax burden.
Please note that I am not a CPA or an attorney and this is not tax or financial advice. Please consult a professional financial advisor, accountant or lawyer before acting on anything in this article.