Tax cuts are generally a welcome topic of conversation. This is because a tax cut is, by its nature, a reduction in the amount of taxpayers’ money that has to be paid toward government revenue. Since tax cuts can end up saving voters money, they’re always popular.
On the flip side, tax increases are collectively loathed. Tax cuts can present themselves in various forms. The government can end up cutting taxes on income, profits, sales, or assets. The cut will then end up being a one-time rebate, a tax credit, or a reduction in the overall tax rate. So, why would any government consider a tax cut and what do they mean for an individual such as yourself?
The Reasoning Behind Tax Cuts
Oftentimes a government will introduce a tax cut to spur economic growth, by fattening the wallets of taxpayers’ who would otherwise be on the hook for paying heftier taxes. Most of the time tax cuts end up being an effective avenue for governments to take in order to end recessions. However, in the short term tax cuts will increase the amount of government debt, because they inherently reduce revenue.
Advocates of tax cuts address these concerns by saying that tax cuts end up paying for themselves by stimulating the economy through individual spending and investment. Tax cuts pull this off through the “multiplier effect”, which implies that they can generate such explosive economic growth that eventually they end up generating higher tax revenue. Let’s take a look at some of the different kinds of tax cuts.
Income Tax Cuts
As is implied in the name, income tax cuts reduce the amount of that taxable income. You or anyone else would be genuinely stoked at the prospect of not having to pay as much of that hard-earned dough on taxes. Naturally, when you’re able to take home more of the money that you’ve earned instead of handing it over to the federal government or state government, you end up spending more and fueling the economy, as a result.
Capital Gains Tax Cuts
Capital gains tax cuts effectually reduce taxes on the sale of assets in a financial year. This manages to put more money back in the pockets of investors. We’re talking about more money back into companies as well through stock purchases. This also ends up increasing the prices of housing, and other real estates.
Inheritance Tax Cuts
Inheritance tax cuts will reduce the amount of taxes that are paid by heirs on assets they inherit from loved ones. This can come in handy, as some of those inheritance packages can end upbringing with them quite the sizable tax obligations!
Now that we’ve taken a quick look at some of the different kinds of tax cuts, let’s take a closer look at the most recent tax cuts and what they could mean for you.
What is the payroll tax cut?
A payroll tax cut effectually puts a hold on the collection of particular wage-based taxes. These are usually collected for social security and medicare. Any workers who benefit from this tax cut will end up taking home more money on each paycheck. The federal government normally levies a 12.4% social security tax on employees’ paychecks. The cost of these social security and medicare taxes are divided between employees and employers, with each party bearing 6.2% of the bill. Wages that exceed $137,700 for annual income aren’t subject to the social security tax. In this case, medicare tax withholds an extra 2.9%, or 1.45% each, that is split between the employees and employers. Any “extra” money that is hitting people’s bank accounts via this new payroll tax cut, doesn’t look like some huge stimulus check. It’s much more so a gradual increase in funds, on a month-to-month basis.
What are the implications of the payroll tax cut?
Trump’s executive order ended up deferring social security taxes on wages that totaled less than $4K on a weekly basis. That ends up meaning that it’ll positively impact anyone who makes less than $104K for their annual income. By positive impact, we mean a potential 6.2% rise for the last four months of 2020. The wide-reaching benefit provided by this executive order is easy to see.
Anyone who is making up to $104K stands to take home quite a bit of extra money, every month. This is comparable to something like what the Australian residents have set up for their health care with the medical levy surcharge. A married couple of Australian citizens that earn more is going to be on the hook to pay more, at a certain point. While anyone who is below a certain amount of money for their annual income will pay less for their health insurance! You can thus see the similarities with how that payroll tax cut is set up for making sure the high-income earners are paying their fair share to support the system as a whole.