Fiscal Policy & Taxation: How Government Tax Strategies Impact Your Investments

We recently discussed Monetary Policy in our previous blog post, and this time around, we will be discussing Fiscal Policy.

These two policy efforts are implemented by various parts of the government, with Monetary Policy being controlled by the Federal Reserve and Fiscal Policy being controlled by Congress. However, they both have the same goals: to either expand or contract the current economic environment.

What Is Fiscal Policy and How Does It Work?

Fiscal policy refers to the government's ability to adjust spending and taxation to influence the economy's current condition.

These are both very important measures for the government to consider, so we will be tackling these in separate blog entries. This post will be focused on the Taxation portion of Fiscal Policy, and a companion post focuses on the Spending side of the policy.

How Does Taxation Fund the U.S. Government?

Taxation is the primary source of funds for the U.S. Government to fund their agreed-upon budget items. In 2024, the total amount of collected taxes could be near $5 trillion!

Almost half of this amount came from income taxes of US citizens, and other large sources were Social Security and Medicare taxes, as well as corporate income taxes. However, the U.S. government still had a budget that exceeded the revenues they collected.

What Are Future Tax Concerns Amid Rising National Debt?

One of our concerns is that tax rates may increase in the future due to the expanding levels of national debt and the associated interest payments.

If the government ever plans to operate on a budget surplus in the future, it will need to either drastically reduce its budget, or they will need to increase revenues by generating tax dollars.

How Does U.S. Tax Revenue Compare to Other Nations?

Current taxes may already seem high, but the U.S. actually collects less taxes per Gross Domestic Product than other developed nations.

The US tax revenue was roughly 27% of GDP, while the average of other developed nations is closer to 34%. This means that our country collects less tax dollars per produced good/service compared to other countries.

However, specifically, income taxes made up a larger portion of the United States' total revenues compared to the average, which means that our additional tax sources, such as property or sales taxes, contributed less than the average.

What Is the Balance Between Taxation Levels?

Deciding on the appropriate level of taxation is a balancing act for the government. They need to weigh the pros and cons of increasing or decreasing taxes. If they increase taxes, then they could fund a higher national budget, but then there is likely less consumption by the citizens. With decreasing taxes, they can achieve higher consumption levels, but they would receive less revenue in return.

Key Takeaways

• Fiscal policy refers to the government's ability to adjust spending and taxation to influence the economy's current condition—controlled by Congress, unlike Monetary Policy controlled by the Federal Reserve.
• Taxation is the primary source of funds for the U.S. Government, with nearly $5 trillion collected in 2024—almost half from income taxes, plus Social Security, Medicare, and corporate income taxes.
• U.S. government spending exceeds revenues collected, creating budget deficits that contribute to rising national debt and potentially higher future tax rates.
• U.S. tax revenue is roughly 27% of GDP, lower than the 34% average of other developed nations—but income taxes make up a larger portion of U.S. revenue than other countries.
• Government must balance taxation levels: higher taxes fund more spending but reduce consumer consumption; lower taxes increase spending but reduce government revenue.
• Rising national debt and interest payments create concerns that tax rates may need to increase in the future to maintain budget sustainability.

Speak With a Trusted Advisor

If you have any questions about how fiscal policy and taxation impact your investment portfolio, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Best Regards,

Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink.