Council Post: Tax Increases To Reduce The Government Debt Load: What Business Owners Should Consider

Ivan Illan is a bestselling author and award-winning financial services entrepreneur.
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With so much new government debt being issued around the world this year, it shouldn’t come as a surprise that taxes could climb as well. Default (not making payments), inflation (paying down debt with inflated currency), taxes (collecting more money from your citizens), and austerity are the only ways to lessen a government’s debt load (which can mean reducing social safety-net benefits). Increased tax collections would likely be the least painful (and politically palatable) of these options, especially when targeting households with incomes above a specific threshold or requiring multinational firms to pay more. My firm helps a lot of small business owners who are having trouble making decisions about tax issues. For decades, there has been a heated dispute about whether low-tax or high-tax regimes produce the required economic growth. This time is no exception.
Household and corporate tax rates in the United States have shifted dramatically during the last few decades. Even if stock market values have continued to rise over numerous times of high taxation, this isn’t enough to establish that greater taxes aren’t harmful. Unfortunately, I believe the tax structure in the United States has become even more complex in recent years. Good luck figuring that out unless you’re a CPA or other accounting expert. Higher tax rates, when combined with multiple levels of deductions or credit opportunities, may be preferable than lower tax rates that lack this flexibility.
Arthur Laffer, an American economist and Reagan administration stalwart, devised a simple yet profound approach for evaluating appropriate government tax rates. The model’s main premise, known as the “Laffer Curve,” is that the government makes $0 at a 0% tax rate and $0 at a 100% tax rate. (Who would want to labor or produce if everything was given to the government?) There is a “sweet spot” inside this paradigm, a Goldilocks-style balance, where people and businesses are driven to work and produce income while the government gets its fair share. But, like with most excellent concepts, the devil is in the details. The concept of “fair share” is likely more divisive today than it has ever been.
With the US government debt at around $28.19 trillion and GDP at $22.06 trillion, I believe something needs to be done to lower the debt load in order to keep the US dollar as the main global reserve currency and Treasury bonds’ reputation as low-risk assets intact. Increasing government tax revenue (perhaps significantly) is a clear option, and with the recent G7 agreement to support a worldwide minimum corporate tax, there may be enough political capital to make it happen.
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Higher taxes could be a good thing or a terrible one, depending on how those dollars are utilized, in my opinion. When taxes are utilized to pay off debt, it provides everyone the same drab sensation that you get when you pay off a credit card balance. You have nothing to show for it, even though it is financially rewarding. Combining debt reduction with tangible improved benefits to most residents, while raising tax receipts from select industries or ultra-wealthy households, could have the wind at its back in these politically volatile times. Ideally, instead of judging whether government taxes are helpful or harmful based on a headline tax rate, consider if they fund the people’s stated goals.
Regardless, I expect any such adjustments to be annoyances to business owners and shareholders in the short term while valuations adjust to the new regime. To ensure future revenue and profit growth, business owners, in particular, should continue to focus on their operational demands rather than tax rates alone. Do they have the “best fit” individuals to achieve this level of expansion? Is more training required to assist employees in carrying out their obligations and duties? Are there any technologies that, when properly integrated, can boost productivity or profitability? Asking questions like these can help to steer decision-making away from short-term tax difficulties and toward longer-term company consequences.
This website does not provide investment, tax, or financial advice. For counsel on your individual circumstance, you should seek the opinion of a licensed professional. CRN202406-276473
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