Making Your Money Last

Let Me Explain

Yes, the new tax law trimmed our tax bill, although I had hoped it would lower it even more.

Some time ago I promised in this column that Kiplinger’s Personal Finance would steer clear of politics. I have tried very hard to keep that pledge. But in the December issue, I unintentionally crossed the line.

What got me into hot water with some of you was how I characterized the new tax law. I said that the ballooning federal deficit was “exacerbated by the latest tax law.” I also said that “I’m still feeling the pain of the new tax law on my family’s budget.”

That unleashed a number of reader e-mails. Several readers said that everyone they knew got a tax cut, so what’s the deal with me? A few readers noted that federal revenues following passage of the new tax law actually increased.

The comments from Greg nicely (and in a nice way) summed up the reader reaction: “Your negative references to tax reform seem quite biased and likely driven by personal experiences with lost tax deductions. I know that a significant portion of your readers will not share your sentiments, while there is near universal agreement that we indeed have no sense of deficit or spending control as a nation.”

I didn’t mean to broadly condemn the tax law or reveal a political bias, although I can see why what I wrote was interpreted that way.

Digging deeper. I took another look at the tax returns my wife and I filed before and after the tax law took effect. Our tax bill did increase, mainly because of a one-time bonus my (hard-working) wife received and the newly imposed $10,000 cap on deductions for state and local taxes, which sliced off a big chunk of what we used to deduct. However, our marginal tax bracket was lower for 2018, and our federal effective tax rate (the average rate on total income) decreased a little. So, yes, the new law trimmed our tax bill, although I had hoped it would lower it even more.

The interaction of the new tax law, revenues and the deficit is trickier, and I turned to the Kiplinger Letter’s staff economist, David Payne, for help in sorting it out. “The theory behind the tax cuts was that they would control the deficit by goosing economic growth so much that revenue would accelerate,” he says. That happened a little, he points out, but not enough for the tax cuts to pay for themselves.

Revenues did rise 4% in 2019, according to the Congressional Budget Office. Individual income and payroll taxes have gone up—largely because of wage increases—to offset a decrease in corporate income taxes. No doubt, the increase in the deficit is fueled by a rise in expenditures (3.2% in 2018, 8.3% in 2019). As David explains, the higher expenditures were mostly the result of an increase in automatic payments for entitlements such as Social Security and Medicare, and for interest payments on the public debt.

The point about the deficit I inelegantly tried to make was that if the tax laws had not changed, revenues would have been higher and the deficit would have been lower. I should also have said that increases in spending are a big part of the problem—and I wish Congress and the president would focus more on a plan to reduce the deficit. And I offer that sentiment in the spirit of nonpartisan fiscal responsibility.

Speaking of fiscal responsibility, our cover story offers a 10-step process for zeroing in on how much you need to save for retirement, plus a worksheet to estimate your post-retirement expenses. That’s an exercise you should do to be sure your balance sheet isn’t hijacked by red ink.

Most Popular

Refunds for $10,200 Unemployment Tax Break to Begin This Month
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Month

The IRS will start issuing automatic refunds sometime in May to people eligible for the unemployment benefit tax exemption.
May 1, 2021
The Benefits of Working Longer
Empty Nesters

The Benefits of Working Longer

Delaying retirement for a couple of years—or even a few months—is the most effective way to improve your retirement security.
April 29, 2021
10 Dividend Growth Stocks You Can Count On
dividend stocks

10 Dividend Growth Stocks You Can Count On

What should investors prioritize in dividend growth stocks? A history of aggressive payout expansion, and the ability to generate enough cash to keep …
May 3, 2021

Recommended

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021
10 States with the Highest Gas Taxes
taxes

10 States with the Highest Gas Taxes

COVID-19 has made us appreciate driving our cars more, but filling up the tank will cost you more in these state.
May 3, 2021