Wealthy Americans have put off some of their tax bills this year, causing such a pinch to government revenue that the U.S. could face a default on its debt months sooner than the White House expected.
High-income taxpayers may be anticipating a future tax cut from President Donald Trump. But they may also accelerate a political headache for him: persuading Congress to raise the government’s debt limit.
The wealthy may have deferred recognizing as much as 20 percent of their taxable income last year, according to independent estimates, a move that is legal and allows them to delay paying taxes on non-wage earnings including capital gains. Trump’s promise of tax cuts gives richer Americans “large incentives to shift non-wage taxable income from 2016 to 2017,” said Lucy Dadayan, a senior researcher at the Rockefeller Institute of Government.
Treasury’s monthly budget statement for April showed weaker-than-expected income tax receipts. The drop in tax revenue is significant enough to alarm top officials, including Treasury Secretary Steven Mnuchin, who has urged Congress to pass “clean” legislation raising the debt ceiling without policy riders by August.
White House Budget Director Mick Mulvaney said last week the administration may soon announce an earlier debt-ceiling deadline, citing the fall-off in tax receipts. The Congressional Budget Office will release an estimate of May tax revenues on June 7, a highly anticipated report among investors.
Politicized Debate
Debates over raising the debt ceiling became especially politicized under former President Barack Obama. Republicans used the specter of a default as leverage to demand spending cuts and other policy changes. Bills to raise the ceiling were commonly passed in the nick of time.
Mnuchin began using special accounting measures in March to stay below the ceiling, and he has projected that the Treasury will run out of money in the second half of the year.
The stakes are high. Global financial markets risk volatility if there is political uncertainty about the U.S. government’s ability to repay its debts. Failure to take action in time could result in the first-ever U.S default. Mnuchin has said he would not prioritize debt payments over other government spending in the event the ceiling isn’t raised.
America’s wealthiest may be partly to blame if the deadline arrives sooner than anticipated. While most people pay their taxes through deductions from their paychecks, richer taxpayers also earn income through the sale of stocks and other assets, or by taking profits out of companies, resulting in capital gains.