US national debt is growing rapidly due to quarantine: will taxes be raised

As of May 2020, the national debt—all the money the U.S. has borrowed and has not yet paid back—stands at more than $25,1 trillion. At current growth rates, the amount could rise by almost 70% to more than $42 trillion in 4 years. For comparison, in 2016 the national debt was just under $20 trillion, writes Grow.

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Understanding how public debt works is very important because American consumers have an influence on this amount: increasing it, slowing growth and helping to offset the debt from its taxes. Some experts believe that tax rates may increase in the next few years after US residents were paid financial assistance in connection with the coronavirus.

“There is a very good chance that tax rates will increase through 2026,” says Ed Slott, certified public accountant and founder of Ed Slott & Co.

How a pandemic affects public debt

The national debt is rising because the US has been running budget deficits for years. This means that every year the government spent more money than it received. Over time, these annual deficits accumulated into trillions of dollars of debt. And interest on that debt topped $2019 billion in 375, more than spending on other key priorities such as veterans programs or unemployment insurance.

The national debt is likely to rise even faster this year because the government has enacted massive coronavirus relief programs to help consumers, businesses and the overall U.S. economy recover from the COVID-19 pandemic. The US Treasury recently announced it will borrow nearly $3 trillion in the second quarter, a record amount.

In the second week of May, Democratic lawmakers offered a second round of assistance worth $ 3 trillion (although it is unlikely to pass, especially in its current form).

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What is public debt

When expenses exceed revenues for a certain period (usually a year), the government is in short supply. The US has been working with a budget deficit on an annual basis for many years. The last year of surplus, when revenues exceeded expenses, was 2000, according to the Congressional Budget Office.

Taxes are the country's main source of income. Total income and wage taxes accounted for about 85% of the money collected by the government in 2019. Meanwhile, expenses include discretionary expenses, including defense, as well as compulsory programs such as Social Security and Medicare. Together, these two programs alone accounted for nearly 41% of total U.S. federal spending in 2019.

If a government repeatedly runs budget deficits, then the difference between funds spent and funds available becomes debt—or money that must be borrowed. At the federal level, the debt is distributed as follows:

• State debt. About 3/4 of public debt belongs to the public, including individuals, companies, other countries such as China and Japan, as well as the Federal Reserve. This category includes all bonds, bills and other securities issued by the Treasury.
• Intergovernmental retention. The rest of the debt is actually held by the government itself. This category refers to the money that the Treasury owes to other federal agencies, such as the Social Security Trust Fund.

The public owns most of the US government debt. Indeed, government bonds are a popular choice for investors because they are considered one of the safest investments: the federal government always fulfills its debt obligations.

Deficit and tax rates

As a result of the coronavirus financial assistance package and other measures under discussion, the national deficit and debt are projected to continue to grow.

Some experts warn that lawmakers may consider raising taxes and cutting funding for programs to curb this growth.

“The most significant risk is that the U.S. government will implement significant tax cuts in the form of tax increases and spending cuts in 2021,” wrote Hugh Johnson, chief investment officer and founder of Hugh Johnson Advisors, in a note to his clients.

For many U.S. workers, tax rates are the lowest in recent years due to the 2017 Tax and Job Reduction Act. An employee who earns $ 55 in 000 will have a marginal tax rate of 2020% if he is the only one filing a declaration, compared with 22% until 25.

Tax rates are planned to return to previous levels in 2026, although this may happen even earlier.

“The government just wrote a check for $2 trillion from a bank account with no money,” Slott says. “Someone will have to foot the bill, and chances are it will be taxpayers.”

Americans are experiencing the financial consequences of a pandemic, not only at the country level. States and local governments are seeing declines in revenue. This is due to the fact that orders for self-isolation and dismissal of people deprive them of two valuable sources: income tax and sales tax. To make up for this loss, states and communities may raise other tax rates, including corporate income taxes, excise taxes and sales taxes, as well as property taxes.

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How to prepare for a potential tax increase

Much of what happens to public debt, deficits, and, ultimately, taxes, is beyond the control of ordinary Americans. However, there are steps you can take now in anticipation of tax increases.

One of the easiest steps: deposit money into Roth retirement accounts, such as 401 (k) or IRA, instead of traditional ones. One of the main differences between a traditional account and an IRA Roth is when exactly you pay the tax. With a traditional IRA, you usually get tax credits on contributions and then pay withdrawal taxes when you retire, while with Roth IRA it's the other way around.

If you have an IRA or an old 401(k) from a former employer, moving that money into a Roth IRA—what's called a Roth conversion—can save on taxes in the future. Even though you'll have to pay taxes when you make the change, the tradeoff is that you'll get a tax benefit in retirement because Roth accounts grow tax-free and withdrawals can also be made tax-free.

Low tax rates, in particular, make the current time "favorable" to consider such a switch, because you will be subject to a lower tax rate than in the future, Slott said. That's why "if you're younger and have lower tax brackets, you should put all you can into a Roth account."

However, no matter how the federal government resolves the historical deficit, exacerbated by spending on coronavirus, you cannot avoid paying taxes in general. And your tax rate may increase over time if you make more money in the future.

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