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Tax Receipts Flash Economic Warning Sign
Submitted by Lance Roberts via STA Wealth Management,
With "tax day" now firmly behind us, it is expected that 2015 will show a record level of tax collections. This is a good thing, right? Maybe not.
Over the weekend, an economist friend of mine sent me an interesting piece of analysis discussing the record level of tax receipts as a percentage of the economy. This is something that I have written about in the past.
While the current push higher in tax collections partially due to economic growth, it is primarily due to higher tax rates brought on by the "2011 Budget Control Act." That bill imposed automatic tax increases and spending cuts beginning in 2013. It is worth noting that then chairman of the Federal Reserve, Ben Bernanke, launched "QE 3" specifically to offset the potential risks of the "fiscal cliff" imposed by the "debt ceiling deal."
The good news is that those tax increases and automatic spending cuts led to a massive shrinkage of the deficit which has declined from a record of $1.35 Trillion in 2010 to just $559 billion as of the end of 2014.
While it is certainly good news that the budget deficit is shrinking from a "fiscal" perspective, the economic ramifications are not so great.
The reason: "The economy is not growing strongly enough to offset the drag caused by fiscal austerity."
Government spending was a support of economic growth prior to the onset of the fiscal cliff. While the President currently takes credit for the shrinkage of the deficit, it was due to no actions of his own but rather a complete "SNAFU" brought about by the ongoing guerilla warfare between the Democrats and Republicans.
The austerity measures automatically imposed by the Budget Control Act of 2011 became a drag on economic growth as the rise in tax collections reduced the consumptive/reinvestment effect of those dollars in the economy. The chart below shows the surge in tax receipts as a percentage of GDP.
(Note: The surge in receipts at the end of 2013 was due to a massive payout in bonuses and dividends due to the onset of the "fiscal cliff" in order to take those funds at lower tax rates.)
While raising taxes may increase revenue in the short run, over the longer term higher tax rates leads to lower economic growth. As stated, if more dollars are extracted through taxes, there is less available for consumers/corporations to utilize. Furthermore, while tax dollars do get recycled back into the economy, repeated studies have shown that government spending has a much lower "multiplier" effect as compared to dollars spent directly by consumers and businesses. Note in the chart above that taxes as a percentage of GDP have historically peaked between 18-20%. Now, let's compare that to actual economic growth rates.
I have highlighted the periods when receipts as a percentage of GDP have peaked. There are two things worth noting in the chart above. Rising levels of receipts have coincided with stronger levels of economic growth in the early stages which is not surprising as more revenues lead to higher collections. However, once those collections exceed 18% of GDP, it has generally marked the peak of economic activity and a subsequent recessionary drag in the economy.
There is one other point to be made. While there are many calls to raise taxes on the rich, give more to the poor, what the chart shows is that none of that really makes much difference. Regardless of the level of tax rates - tax receipts as a percentage of the economy has remained mired between 16 and 21%. Why? Because when you raise taxes, you lower economic growth and, therefore, collect less in revenue. During recessions, tax collections are at the lower end of the range while during expansions collections are at their highest.
So, what does all of this mean? As Tom McClellan recently noted:
"As Arthur Laffer noted 3 decades ago, it really is possible to set tax rates too high such that it actually hurts the economy. We appear to be in such a condition now. I wrote about this topic back in January, when lawmakers were contemplating raising the tax on gasoline. But it is worth revisiting as we see total federal receipts creeping up toward 18% of GDP. Whenever total federal tax receipts have exceeded 18% of GDP, the result has always been a recession for the U.S. economy."
The chart below shows receipts as a percent of GDP as compared to the S&P 500 index. Note that each peak in tax collections has coincided with a mean-reverting event.
While there are many that expect that the markets can repeat the secular bull market of the 90's, and by extension receipts could test the previous high, Tom makes a salient point as to why this is not likely.
"In 1999, the members of the Baby Boom generation (born 1946 to 1964) were between 35 and 53 years old, in the peak of their entrepreneurial years. They were working hard, building companies, and pushing the economy faster than it would normally go. Now, they are 51 to 69 years old, and are more interested in playing with their grandchildren than in starting a new company and hiring people.
The children of the Baby Boom generation make up what is known as the 'Echo Boom', which peaked in the birth year of 1990. Those 1990 babies are now just 24 to 25 years old, and many are just now moving out from their parents’ homes. So they are not quite at their peak of hard work and entrepreneurialism, and even when they do reach that point, their numbers are just a shadow of their parents’ generation. So the Echo Boomers cannot absorb the same degree of a repressive tax burden that the Baby Boom generation could."
This, along with a variety of other reasons I have addressed previously, suggests that the current economy and market are likely at their later stages of expansion currently. As Tom concludes:
"And we need to keep the federal receipts number well below 18% if we are to avoid the next recession, and its associated downturn in stock prices. We may already be too late in that regard."
Tax receipts are clearly issuing a warning sign. However, as is always the case, you can NOT make short-term investment decisions based on very slow-moving economic variables. This has been a common mistake made by investors. Irrationality and exuberance, along with massive Central Bank interventions, can keep asset prices inflated for far longer than logic would dictate. This is why technical analysis of price trends is so critically important to understand over the near-term.
It is unlikely that stocks have "reached a permanently high plateau," or that this time will resolve itself differently. Eventually, reality and fantasy will once again reconnect and throughout history it has never been reality doing the "catching-up".
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Tax Strike...anyone?
RIPS
If taxes mattered, some genius would figure out we'll never be able to pay off the debt and it would all be over.
They will have to reduce treasury interest because all other sources of revenue are tap city. Once interest rates rise, they will need more and more tax $$$ to service the debt. This of course will lead to a recession as tax rates exceed 21% and this whole mess comes screeching to a halt. All they can hope to do now is turn Japanese. Zirp and sideways forever.
Automatic Spending Cuts....
Almost exclusively on the Military, and
Forced on Obozo by the Republican House.
(things the Tylers will NEVER admit)
All these charts are worthless.....the only thing turning down that will take everything else with it, are the equity markets. If that happens, all hell is gonna break loose. Thats why the Fed is defending the stock market like no tomorrow...because there will be no tomorrow if that last bastion of defense breaks.
"Dude......there is this thing.......called the IRS....you know.....and so...they like take money right out of your check......you know.......and it's like alot........and it such bullshit cause....like.....they have like a million dollars just for the army alone........and like nothing for the starving people and for things like free video games"
Laffer.....whatever.
So, he pretends like up to a certain point tax is BENEFICIAL to the economy? BS
The Laffer curve is only relevant for government that wants to maximize is tax revenue.....That does not mean a single cent of that revenue IMPROVES the economy.
Kaiserhoff - There is a deeper story. The reserve currency is the global policeman. The US is doing what Great Britain started to do in the 1930's as it began handing GRC reigns to the US which was to cut it's Navy (curb projection capabilities).
Now GRC is being handed off to China. See that article on Yemen and small contigent of Chinese troops there? Your going to see a lot more of that as time goes on in a lot of countries.
Security details change with the GRC. That is also why we're seeing more direct military involvement in the ME from Saudi Arabia.
As for GRC in America I say good riddance. It has had a terribly corrupting influence on our politics and bad foreign trade deals along with kicking the can and overspending to police trade which benefits America little these days. It also turned us into a police state with a society that is going to have to relearn 'Save and Invest' economy.
We have to get our shit together now can't just print and kick the can. The ongoing restructuring will be further pain but wont last forever.
I can't wait for my .GOV to let me know when we are in a recession....
(hint: Wrong word...although it does rhyme.)
working on it
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
That's not a problem. Just make a few hedonic adjustments to GDP.
Add Hookers and Drug Dealers and its all good...
You ain't keepin' up - hookers and dope (and gambling) ain't doing so hot lately, as reported right here on zh.
thanks Tylers, going all in short here, maybe doomish article #34557 since 2010 will be the charm!
Or not....
No mention of people tapping their 401Ks.
Well damn procrastinator.... U don't procrastinate so well any more!
Does it matter now ? Probably not..... I was at the Atlanta fed GDP chart site today and was doodling around looking at the different charts along with the GDP one they have and I recommend especially one there.....
Interesting analysis.
THIS IS ONLY FEDERAL TAX RECEIPTS!
I've been trying to draw attention to the fact that the largest % increases in taxes are NOT coming from the Federal Government (Obamacare notwithstanding), but at the STATE AND LOCAL LEVEL. A small tax of $200 a year going to $300 might not sound like a big deal but that's a 50% jump! Multiply that by the number of other "small, local" taxes and pretty soon it's real money. Almost all new taxes are state & local taxes (again, Obamacare notwithstanding). Fees, permits and licenses are also taxes, almost always controlled by state or local government, too and there's a new one every damned day. It's like being eaten alive by ants out here in the real world.
Who gives a shit whether my income goes up by 10% if I take home nothing extra after taxes?
Tylers- maybe this would be a good idea for an article? Maybe?
"Tylers- maybe this would be a good idea for an article? Maybe? "
Ok, which of us is going to bust the spread sheet and earn our contributors cred?
I'll flip you for it: heads I win tails you lose.
No kidding.
Here in the Democratic-SuperMajority-Controlled-Workers-Paradise of Kalifornia we have top tax rates of:
TAXES ON INCOME:
39.6% Federal Income Tax
12.3% State Income Tax
6.2% FICA Tax Rate
2.35% Medicare Tax Rate (New; thanks to ObamaCare)
0.9% State Disability Insurance Tax
0.1% Employment Training Tax
[Total Top Marginal Income Tax Rate in Kali: 61.45%]
TAXES ON PROPERTY:
1% (of TOTAL ASSESSED VALUE) Real Estate Property Tax
[+ Payments on Municipal Bonds (schools, water, power, sewage, etc.)
0.65% (of BlueBook Value) + $94.00 Vehicle Registration 'Fee'
TAXES ON PURCHASES:
7.5 - 10.0% Sales Tax
68.3 cents/gallon Gasoline Tax
When you total these taxes up, it becomes quite clear that many households with two working professionals are paying in excess of 3/4 of their income in taxes each year.
While everyone knows we are turning into a nation of "Haves & Have-Nots" we have already become a nation of "Pays & Pay-Nots."
The reality is that the bottom 60% of US citizens PAY NO INCOME TAX WHATSOEVER, while the vast majority of these taxes (93%) are being bourne by the top 20% of workers.
http://cnsnews.com/news/article/terence-p-jeffrey/cbotop-40-paid-1062-income-taxes-bottom-40-paid-91-got-average-18950
"Top 40% Paid 106.2% of Income Taxes; Bottom 40% Paid -9.1%, Got Average of $18,950 in 'Transfers'"
[This cannot end well...]
Sounds like CA needs more workers from Mexico, India and China/Asia, to keep the show going, and for others to start moving out.
Oh, wait...
Yea well they found out I didn't owe them a million and a half bucks but that they owed me..... should see the check by this summer. I'm in snail mode my taxes in those years r one hell of a thing to go through... And they aren't just throwing the stuff away anymore.
We have a good person dealing with them now.... It got pretty bad for a while after they figured out as I knew I owed them nada and they owed me money!!,
All your wages and earnings are belongs to us.
When you have to cash out your 401K/I.R.A. to survive you get taxed out the ass. There's your economic signal right there.
And the deficit is not shrinking: http://www.usdebtclock.org/ (the "shrinkage" is accounting gimmicks).
Yes its the local fees and licenses that have been going to the moon.....and for that so called downturn in Real estate...my Real estates taxes never drooped one dime...and supposedly they readjust every two years....lol..liars
"Whenever total federal tax receipts have exceeded 18% of GDP, the result has always been a recession for the U.S. economy."
But it's different this time. We appear to have been over 18% for awhile now.
I adore quandary economics!
It has always had a special place in my heart.
Since I was just a little girl....
Interesting that a half a trillion dollar deficit is considered austerity.
Thats the half they told us about.
Indeed.....
Ain't nobody mentioning the billions in kickback fines .. er revenue... .gov got from the banksters.
This beast is way too fat and needs to get skinny.. quit overfeeding it !
Ooo yea the A word.....
Kiki did u hear that word? Lol that camel don't fit in that needle eye!
Someone is picking up a basket of commodities.... Not PM.s but lots the good ones up .... Future demand for special needs stuff. just from what I can see... On my portfolio.... Haven't looked at entire complex. Must be waiting for stronger dollar to nibble on PMs
Gold miners up today while metals down and that's unique
Stock market profist from printed money is not an economy warming up.
Good time as ever to raise interest rates. Deficit is shrinking. More room to pay higher rates. Banksters have children too!
RI nibble on another uvxy triple long fear on its lows today in the chill~ I have 2500 now!!!!!
Yay, we're only spending a half a trillion more than we have. I would like to here Barack Obama call into the Dave Ramsey show and explain how great we are doing. That would be a funny conversation. Austerity, yeah right.
hookers need to move to WA-DC, don't they know that is where the money is
the big money prostite are already there....Obama, Hillary or pretty much any of them would do anything for money...
The new normal is NOTHING makes a difference...the market will go up...the FED will print, lie, collude, extort, anything to make the market go up! We have endemic corrupt of wall street buying all aspects of government and research!!
Obama, Hillary, Bill(THREEWAY) and the Democrats plan a USSR/Cuba style government with 100%. USSA!!! Obama was just asking Raul this question
So tax receipts at 18% of GDP
Health care spending at 19% of GDP
And people are spending 33% of their income on housing, on average.
Doesn't leave a hell of a lot left for everything else in life, and we haven't even accounted yet for food and education and transportation and a host of other essentials.
Dude they are contractors. They'll write whatever they are paid to write as a statistic.
73% of all statiticians make up 81% of economic statistics 57 % of the time.
America's past is a living labratory as to what can be done with smaller government, less taxes, better work ethic, more european genetics, and a smaller social program budget. All of which have gotten worse over the last 30 years.
There is only one "slight" problem with that top most chart.....
Its using teh social security payroll tax and the medicare deduction as general revenue....which its not supposed to do.
You do that arithmatic on that, take out the payroll tax and medicare taxes out and look at the deficit numbers then.....
woooohoooo!
But lets not talk about that. Shhhhhh..
Squid