Congress Is Missing an Opportunity to Address Long-Term Financial Issues

Beyond the short-term budget battles is the looming expiration of many parts of the 2017 Tax Cuts and Jobs Act (TCJA).

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

As I write this, the U.S. Congress has once again waited until the last minute to pass a spending a bill. Rather than focusing on a long-term budget, a continuing resolution bill was passed. Such bills merely kick the can down the road until the drama repeats itself again. (In this case, in late January and early February 2024.)

What works well over the short term for bringing in campaign contributions frequently comes at a long-term cost to the country as a whole. “There is an increased risk that political divisions could further constrain the effectiveness of policymaking by preventing policy action that would slow the deterioration in debt affordability. These risks underscore rising political risk to the US’ fiscal position and overall sovereign credit profile,” noted Moody’s in early November. The credit rating agency put U.S. sovereign debt on “negative watch,” while affirming its Aaa rating.

Beyond the short-term budget battles is the looming expiration of many parts of the 2017 Tax Cuts and Jobs Act (TCJA). Lower tax brackets, higher standard deductions, the suspension of the personal exemption, higher alternative minimum tax (AMT) exemptions and other changes are set to expire at the end of 2025. Congress will need to either extend the TCJA or pass new tax reforms to prevent these provisions from sunsetting.

There seems to be little agreement right now. The Kiplinger Tax Letter recently noted that “several Republicans” from California and New York have been holding up tax bills in an effort to repeal the $10,000 cap on state and local income taxes (SALT). Democrats have their own internal divisions about tax policies as well.

One would expect taxes—and particularly the TCJA—to be a big issue in the 2024 elections, with both the White House and control of Congress up for grabs. Depending on who the major parties eventually nominate—and whether there is a third-party candidate capable of getting enough support to have a significant impact—the focus of the campaigns may well be on other topics.

Certainly, well-reasoned debates have been replaced by talking points and misinformation. This is unfortunate, because forthcoming sunsetting of many of the TCJA’s changes provides an opportunity to think about the long term. The dates are nearing for when the hospital insurance (Medicare) trust fund and the Old-Age and Survivors Insurance (Social Security) Trust fund become depleted. A long-term plan for addressing the federal debt is needed before the bond market insists upon it.

Beyond these issues, I find myself in the unenvious position of wanting to defend the Internal Revenue Service (IRS). Among the agency’s primary functions is bringing money into the government. Part of this function involves enforcement, but audit rates remain near historical lows. This makes it easier for those who want to skirt the law to do so.

There are other ways that maintaining higher funding to the IRS would help. There has been a documented backlog of processing paper returns. The agency’s computer system needs an update—including for cybersecurity reasons. Greater availability to answer taxpayers’ questions would be a positive.

The agency itself is taking a positive step forward with its Direct File pilot. This test, which will be run in 2024, will allow certain taxpayers to file their returns directly with the IRS. It doesn’t replace tax professionals or third-party applications and websites; rather it is a free alternative. Several states allow taxpayers to file directly with them, including Illinois, so it’s time the federal government does as well.

No one likes paying taxes, including me. Do I think the tax code needs to be simplified? Yes. Is my preference to keep taxes to the bare minimum required for the government to function effectively? Absolutely. Do I think Congress will wait until late 2025 before passing a follow-up bill addressing the TCJA’s sunsetting provisions? Sadly, yes.

We can’t fix the political environment. We can help you make sense of the tax code. Our annual tax guide is featured in this issue. In it, we share the key 2023 rates, deductions, limits and exemptions the majority of individual investors will need to know. We also discuss the changes coming in 2024—including those parts of the SECURE 2.0 Act that will go into effect.

On behalf of everyone at AAII, I wish you a happy holiday season,

Chuck Rotblut siganture image

Discussion

ROBERT A from NC posted over 2 years ago:

Politicians and bureaucrats are like everyone else--they are self-interested. Thus, they can be counted on to do what is in their best interests, not necessarily what is in the country's best interests. The Founders knew that, which was why they intended to set up a relatively small, limited government that lacked the power to do too much harm.


DAVID H from NV posted over 2 years ago:

A political party that annually whines for cutting government spending just sliced increased funding for IRS staff to go get the income tax revenue from the growing number of tax cheats who deliberately refuse to pay their fair share of taxes? If you truly want to try and balance the federal budget, give the IRS the staff and power to enforce tax law and get what is rightfully owed. I have zero problem with having 85,000 new IRS agents go after tax cheats.


BARRY J from TX posted over 2 years ago:

Charles, Robert, and David are right. When the Founding Fathers created the system of checks and balances that SCOTUS has strictly construed since Marbury v. Madison in 1803, all branches of government must “swim within their lanes” and SCOTUS will enforce the “separation of powers” as enumerated. The Constitution gave the House of Representatives the “power of the purse” for reasons that reinforce good governmental practices. Why did they choose to let the House – the group elected every two years vs POTUS every 4 years (with a max of 8 years) and the Senate every 6 years -- have control over the budget implemented by POTUS and federal agencies? They expected that the American voters would vote OUT profligate or irresponsible House members and replace them with fiscally responsible members every two years. The expectation was that short-term legislators would serve and then go home. Their second expectation was that the voters back home would pay attention to issues that needed attention through an active – and very political - press. This was all before organized political parties had coalesced into continuous organizations in the 1820s-1950s. What the Founding Fathers are saying across those 235 years since 1789 is that if you don’t like how your Representative is performing, vote him/her out/ send them home/vote for someone who will. But, alas, there are so many issues each time we vote, And today the issues that divide us are so stridently and fructuously consume our attention and energies. Budget size and allocations, taxation WITH representation, national defense needs, and a government responsible to the citizens – the three things that matter most in 1776 - are viewed as givens. “Noisy” issues get all the money. It does not have to be this way. I have two nightmares. Nightmare #1: In every one of the four states that were the deciding “swing states” in the 2020 election electoral votes, there were enough eligible voters who could have changed the outcome, but (a) they did not register to vote, or (b) they did not vote, AND (3) they were among the most noxious complainers since 1/6. Nightmare #2: We all have to accept and live by the fact that the guy in line behind you in the voting line probably cast a vote that cancels your vote out. In 1957 JFK wrote “Profiles in Courage,” which focused on the careers of 8 US Senators whom Kennedy felt had shown great courage under enormous pressure from their parties and their constituents. The one overarching fact that ties all these observations together is this: You get what you vote for … AND … you get what you don’t for. You deserve what you vote for … and … what you do not vote for. And if you don’t like the government you have, vote for someone else, but always vote. Remember there is a guy in line behind you who is going to vote too. That’s why we call this form of government a democracy. Votes count, and we only count votes. What they say about everyone having an opinion is true. As Pogo said, "We have met the enemy and he is us."


ROBERT A from NC posted over 2 years ago:

It shouldn't take 85,000 new government agents to find the tax cheats. Those agents are likely to cost at least $20 billion per year. That's a lot of cheating. I'm afraid the more likely scenario is that we'll have 85,000 self-interested individuals looking for something to do, which means (among other things) auditing the crap out of those of us who don't cheat. And that's time consuming, aggravating, and enormously stressful, not to mention expensive--even for honest taxpayers.


ROBERT A from NC posted over 2 years ago:

If 85,000 new government agents are needed to ferret out cheating, that implies that there’s an enormous amount of cheating going on. And that, in turn, implies that there’s a huge systemic problem. Maybe the system needs to be changed to make it simpler and easier to manage instead of spending more money on an overcomplicated, cumbersome, EXPENSIVE bureaucracy. Why does the “solution” always have to be bigger government?


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.

Download the FREE Report Here: