Published on 23/11/2020

This year has been anything but easy for the average tax-paying citizen. Businesses have suffered, job losses have been rampant, and people have continued to work on as much as 50% pay cuts. And now, people from all stratum of society are set to be affected by the tax plans for the year 2021.

The top bracket for the federal income tax at the moment is 37%, which applies to the joint filing of over $628,300. This bar is set to go up to a whopping 61% after adjusting for tax deficits.

Why?

Here’s how:

Taxpayers will have no means to escape this surge in Deficit Adjusted Tax rates. All for the sole reason that there is only so much money that an economy, especially the American economy, can generate. And when the country is already reeling under the economic consequences of the coronavirus pandemic, the projected economic growth takes a hit. 

Tough times as these demanded proactive measures from the Government. This is why there were two packages for COVID-19 announced by the Federal Government. A total of $3 trillion have been passed as assistance to those worst affected by the pandemic. Most of the funds have been disbursed by the IRS, while most people are slated to receive the money soon. 

Extrapolating the existing data, the Congressional Budget Office said that $25.8 trillion would be collected from individuals and corporations in the form of tax revenue for the next decade. Out of this, total deficits for the decade amount to a little over $13 trillion. And the year 2021 has brought another deficit of $3.1 trillion in the light of the pandemic.

Taxes are a significant source of revenue for the Federal Government. A rising deficit can make it impossible for the Government to dish out social benefits to people if income tax rates are not adjusted. In an alternate universe, the tax rate wouldn’t have been hiked if there was no pandemic. 

And that is precisely how the Government will use the hike in income tax rates to cover up the deficits. It is speculated that a taxpayer will have to pay another 50 cents for every dollar owed to the Government as per the projected deficit Adjusted Tax Rates. All this to help the Government cover its deficit. 

The Government has not only those affected by the pandemic to look after- they also have to make sure that social security benefits and retirement benefits are given to all those registered. Therefore, the U.S Treasury will use every penny of the revenue generated from social security taxes to make sure that retirement benefits continue to be rolled out, unhindered. 

Ergo, most people will feel that it is only fair that all taxpayers come together to collectively help the country move forward, getting rid of their deficits. 

The Government has another way of covering the deficits- inflation.

The only problem with inflation is that EVERYONE becomes a target of a rise in daily commodities prices. In contrast, taxes will only affect those making a particular amount of money. Inflation will further push the already poor into extreme poverty. High tax-paying citizens will have the money to live through inflation, but the poor won’t. However, the Government could try doing both with different permutation-combinations to save themselves.

And if you are assuming that your tax bracket will go down in retirement? The Government is going to take taxes owed by hook or by crook. The sad news is- it won’t happen- your descendant or heir will have to pay the deferred taxes you owe. 

Congress could hike their tax plans for those fretting over the 61% taxes and push it even beyond 61%. Other taxes like short-term gains tax, capital gains tax, and even interest could be hiked in the future (as estimated from the table). The bottom line is- there is no escaping from this progression, and the only thing taxpayers can do is- take it with a pinch of salt or two.

And you can get in touch with us at [email protected] to know how you can shield your investments from excessive taxing.