As with any individual or institution, the financial position of governments is fully reflected by their assets, liabilities, income, and expenses. It’s pure math. When income exceeds expenses, assets rise. When expenses exceed income, assets fall. Whether or not you have liabilities is a function of your timing decisions.

For instance, homebuyers taking on a mortgage are making a timing decision. They believe they will have enough consistent income in the future to make the payments. When done prudently, this can be a manageable, and even wise, risk to take.

Governments are in a unique position. They can instantly enhance their financial position by printing money. This can be reflected in an increase in assets or income, or a decrease in liabilities.

However, like any institution, a government represents a collection of interests. They cannot be viewed in a vacuum. Individual income taxes represent about 50% of US government income (revenue). Another 36% comes from payroll taxes intended to fund Social Security and Medicare. Corporate taxes contribute around 7-8% with the remaining 6-7% coming from excise taxes, estate taxes, customs duties, and other sources.

According to the Congressional Budget Office, the 2024 US Federal budget deficit is projected to be $1.9 trillion, or about 6.7% of GDP versus the historical average of 3.7%. So, to keep the deficit at the average level, tax rates must rise by 3.0%. This could be achieved by raising each individual tax bracket by 3%. Or, because most tax revenue is collected from those in the highest tax bracket, perhaps raising the rate on this single tax bracket from 37% to say, 43%, might do the trick. 

What about Kamala’s proposed 28% capital gains tax? Would that do it? Stay tuned next month for our perspective.