As I presented my quarterly Capital Markets Review last year, I noticed that projections of future Federal budget deficits all had an endnote—they could change depending on the expiration of President Trump’s Tax Cuts and Jobs Act (TCJA) at the end of 2025. In other words, the deficits may not be quite as large if Congress allowed taxes to increase. If the Democrats had won, the TCJA was expected to expire. Now, things may be different as President Trump is talking about a different approach.
Out of Control Federal Spending
In the last five years, the debt of the U.S. Federal Government has increased by over $14 trillion! In fact, about three-fourths of the entire $36 trillion debt has been accumulated since 2008! This situation has not resulted from a drop in revenue—tax receipts are higher than ever. The U.S. government has a spending problem, and the current trajectory is unsustainable.
Changing Expectations
As a planner, I have had many discussions on adjusting expectations based on the expiration of the TCJA. Now, we may adjust in the opposite direction.
- Income tax rates should not be increasing across all brackets. The top rate shouldn’t go from 37% back to 39.6%. The 32% bracket shouldn’t go back to 33%. The 24% bracket shouldn’t increase to 28%. The 22% rate shouldn’t become 25%. The 12% bracket shouldn’t return to 15%.
- The standard deduction should not be cut in half.
- Taxpayers should not have to prove they have healthcare insurance.
- The child tax credit should not be going down.
- The estate tax exemption should not be cut in half.
- Funds from 529 plans should still be available for K-12 education.
- Deductions for State and Local Taxes (SALT) should remain capped at $10,000.
- Owners of pass-through businesses should retain their 20% deduction for pass-through income.
All the above depend greatly on individual tax situations. Please consult with an appropriate tax professional for personal applicability.
Lower Taxes – Not Higher
In addition to the list of tax provisions above, President-Elect Trump has proposed eliminating the tax on tips and Social Security receipts … among other proposals.
Cutting Spending
The incoming administration recognizes the country has a spending problem. That is why there is a plan for a Department of Government Efficiency (DOGE) headed up by Elon Musk and Vivek Ramaswamy. The mandate for this department is to root out fraud, waste and abuse, and find areas where federal spending may be reduced. The initial stated goal is to reduce annual federal outlays by $2 trillion.
Economic Impact
If the effort to reduce federal spending is successful, it may result in a reduction of some financial support for the economy. That may increase economic uncertainty in the short term.
How will the markets react and how should investors prepare? My perspective is that the short-term may be more volatile than last year. However, markets tend to take a long-term perspective. If this approach is successful, it should prevent the catastrophe currently in the long-range forecast. Markets may react well to that projection even in the short term. Active management and portfolio vigilance will be crucial.
Current deficit spending is unsustainable. At some point, there is a mathematical certainty of failure. Taking action now to reduce spending should allow for a different outcome and also allow individual Americans to keep more of their own wealth. Only time will tell how this turns out.
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