The Coming Government Windfall

| April 12, 2024

Now that tax season is almost over, I have a prediction. The federal government will collect a lot more in taxes. This will not be because of any politician’s policies, but because interest rates are higher. Clients are paying more in taxes because they are collecting more in interest. We alerted readers of the blog and the newsletter that this would happen.

One sure way to pay less tax is to make less money. This is not a good strategy since the highest bracket in 2023 was 37%. Very few people pay at this level federally. Nevertheless, a person in the top bracket would owe 37% in federal taxes. This means that they kept 63% of their higher interest income.

How much of higher taxes is attributable to higher rates? Consider that short rates have increased by roughly 5%. A person with $300,000 in T-bills would have about $15,000 additional income. Someone in the highest bracket would pay $5,550 more in taxes, but he or she would keep $9,450 in higher income. Of course, individual tax returns are more complicated than this illustration. Factors such as Social Security and what state one lives in have an impact. In any case, taxpayers are generally better off making more money and paying taxes since they keep the majority of what they earn.

Which is why I predict that the federal government will collect more in taxes this year. I also predict that politicians will claim credit for “lowering the deficit.” Of course, the government is only getting back part of the higher interest that it is forced to pay, so the deficit will continue to get worse. Interest on the debt is more than $1-trillion, which makes interest expense cost more than national defense.

Meanwhile, I am happy that our clients who live on a fixed income are earning more, even if they need to pay a portion of their increased bounty in taxes.