As the US election approaches, the issue of tax revenues has traditionally become a cornerstone of the campaigns of candidates Kamala Harris and Donald Trump.
It is important for investors to keep an eye on this, as the growing budget deficit is unlikely to decrease without spending cuts and new sources of revenue. But most of the proposals coming from Republicans and Democrats make no sense and violate the principles of a fair and efficient tax system.
Firstpost reports that in fiscal year 2024, the US federal deficit reached $1.8 trillion, the highest since the COVID-19 pandemic. This is due to increased spending on social programmes and debt service.
The main reasons for this deficit are increased spending on interest and programmes for older Americans as the government tries to bridge the gap between spending and tax revenues. The deficit for fiscal year 2024, which ended on 30 September, shows that the government spent significantly more than it collected in revenue.
Congress has warned that interest payments on the debt have reached $950 billion, which is more than the Pentagon’s budget. In fiscal year 2024, the US government under Joe Biden spent $6.8 trillion, an increase of about 10 per cent over the previous fiscal year. In 2023, the federal budget deficit reached $1.7 trillion.
The current fiscal imbalance could make it difficult for Congress to reach an agreement on spending for fiscal year 2025 and address the debt ceiling. The budget deficit is a concern during the presidential election.
Harris and Trump have different approaches to managing US finances
Democratic and Republican candidates are proposing expensive policies without a clear financing plan. This could lead to a further increase in the national debt. According to the Committee for a Responsible Federal Budget, Trump has proposed programmes or tax policies that could increase the debt by $15.2 trillion or $1.45 trillion by 2035. He has also proposed heavy import tariffs that could raise $4.3 trillion over 10 years.
The Committee estimates that Harris’s proposals could cost up to $8.1 trillion, but could be fully funded by raising taxes on the wealthiest individuals and large corporations, as well as increasing capital gains taxes. Harris has promised to keep the 2017 tax cuts for those earning less than $400,000 a year and set the rate at 39.6% for the highest tax brackets. However, she did not propose any new tax rates for those whose income falls between these ranges, making it difficult to assess the impact of this policy on the budget.
Overall, Trump’s platform could increase the national debt by $7.5 trillion over a decade, while Harris’ proposal could increase it by $3.5 trillion.
One of the candidates’ ideas involves a significant increase in marginal tax rates. Perhaps what the politicians are neglecting to mention here is that people did not pay these high rates. Since the 1950s, federal tax revenues as a percentage of GDP have been remarkably stable, averaging 17.5 percent. Taxpayers did not report income that would have placed them in the highest bracket, taking advantage of loopholes such as shifting income to the corporate sector, where tax rates were lower, or to family members in lower tax brackets.
As a result, the revenue collected by the federal government as a percentage of GDP was no higher when the top marginal rate was 90 per cent than when it was just under 40 per cent. It is worth mentioning here the Laffer curve, which demonstrates the correlation between tax levels and tax revenue. It illustrates that if taxation is too high or too low, tax revenues may decrease.
How to fill the budget in a fair and equitable way without damaging economic incentives
Are there any ways to increase state budget revenues while maintaining fairness and not harming incentives? The best option would be to close existing loopholes. Another target is the ‘transferred interest’, the share of deal profits that private equity fund managers receive. Investment in new ventures should be encouraged, but income from managing such ventures should be taxed like all other income, not as capital gains.
If fiscal fairness requires the rich to pay more taxes, then the most effective method is to legislate for the constructive realisation of capital gains upon death, when all assets should be valued for estate tax purposes. Currently, the cost of assets is calculated to the current market value at the time of death, and capital gains taxes are avoided. The introduction of such taxes after death corrects this avoidance and the lock-in effect of tax avoidance through the ownership of valuable shares.
Another way to raise revenue would be to add a federal consumption tax to the current income tax. In a sense, it makes much more sense to tax people for what they receive from the goods and services produced by the economy, rather than for what they put into the production process through labour and investment.
And there are methods to make consumption taxes much less regressive. One of them is the income tax. It reduces the burden on low-income workers because they pay taxes only on what they actually earn, not on their entire income. Property tax is also less regressive, as it depends on the value of the property rather than the income of the owner.
A fair tax system should raise revenue at minimal cost to the economy, be easy to administer, and not distort economic decisions. Taxes should be fair: people with the same income should pay the same taxes, and wealthy taxpayers should pay more. However, the rates should not be so high as to discourage labour effort and investment in innovation.
Analysts note that given the influence of lobbyists in Congress, there should be no illusions about the difficulty of closing loopholes. However, politicians should not give up on the goal of creating a fairer and more efficient tax system.
Tetyana Morarash
