Stocks are drifting higher this month after a minor decline in April. In fact, the gains so far in May have almost cancelled the decline from April.
One reason for the market’s recovery this month is the April jobs report, which proved to be just right – not too hot and not too cold. Strong job gains in April would have raised concerns of higher wages and inflation, lowering the probability of any interest rate cuts this year. A weak jobs report would have boosted the odds of rate cuts, but could have stoked concerns the economy is slowing too quickly. Instead, the report showed job growth slightly less than expected, but not too weak. Just right.
Although it’s not getting much press yet the new Congress, and whichever reelected president wins, will face some major fiscal decisions in 2025. The Tax Cuts and Jobs Act of 2017 (TCJA) is set to expire at the end of next year and reverting back to pre-2017 tax rates will likely impact most, if not all, American households.
Counterintuitively, the red numbers indicate an INCREASE in the tax rate for that bracket.
I need to clarify something here. While it looks like a married couple earning $490,000 will be paying a 2% lower overall tax rate (33% vs 35% currently), this is not true. The way tax brackets work is a common confusion among many taxpayers. According to the chart, the first $22,000 that everyone earns will be taxed at a 10% rate – the same as before. Any income over $22,000 up to $89,450 will be taxed at a 3% higher rate – 15% vs 12% currently. This continues up the scale so that every “chunk” of income gets taxed at a higher rate. Accordingly, a couple earning $490,000 would only pay a 2% lower rate on income between $462,501 and $490,000. Their overall tax bill on all their income would certainly be higher if the TCJA were allowed to expire.
Extending the tax cuts will be tricky as doing so will reduce potential tax revenue without a certain corresponding increase in economic growth. The national debt is quickly approaching $35 trillion and we’re currently adding another $1.8 trillion of debt per year.
https://www.usdebtclock.org/#
According to CBS News, this accelerated spending, plus higher interest rates put in place to reduce inflation from 9.0% two years ago to 3.5% today, have dramatically increased our interest payments on the $34.7 trillion national debt.
Federal spending on interest payments is forecast to hit $870 billion this year — exceeding the $822 billion that the nation will spend on defense in 2024, according to a recent analysis by the Congressional Budget Office. This year’s outlay for interest payments represents a 32% increase from last year’s $659 billion in interest expense.
https://www.cbsnews.com/news/federal-debt-interest-payments-defense-medicare-children/
Unfortunately, these issues don’t get much attention in an election year, but they should.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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