Tax Revenue

The more we dig into the bones of President Obama's new budget plan, the more it becomes clear that, as JP Morgan's Michael Cembalest notes, the battles of the future (among our peak-polarized political class) will be between raising taxes and cutting entitlements as the discretionary spending well is empty. As the Budget Control Act cuts this discretionary spend to a 50-year low (close to only 5% of GDP), it is the rise in entitlements (and of course interest costs) that appear mandatory for now and will need to be 'balanced' with tax revenue growth that is expected to rise from 15% of GDP to 20% of GDP by 2022 (thanks largely to a belief that cyclical recovery will save us). As the real ranks of the long-term unemployed and now disabled benefits receivers swell, it seems clear how the entitlement-taxation see-saw will swing unless there is change everyone can believe in.

In his best Lewis Black impression, TrimTabs CEO Charles Biderman succinctly destroys the 'growth' myth behind Obama's budget plan as nothing but a handout and money-printing exercise in futility and drain-circling. Based on the $3.8tn budget plan, the TrimTabs truth-seeker notes that current government tax revenues are about $2.4tn, and growing at no more than $100bn each year, making the math surprisingly simple - we spend around $300bn per month and receive only $200bn with the missing $100bn to pay for the US government's largesse (income shortfall) coming from - 'printing money'. The spin is, of course, that revenues will somehow magically start to grow faster than spending and shrink the budget deficit. With take home pay at $6.3tn for everyone who pays taxes, up $300-400bn from the 2009 low, but still well below the $7.1tn rate from early 2008; Biderman's consternation at the self-hypnosis that a $200bn tax increase in an economy where take-home pay has been growing by only $100bn per year will somehow create anything other than slow-growth at best (or more likely contraction) is palpable. This slow- or no-growth will mean less tax revenue and more spending on safety-nets and thus the Sausalito-savant factually points out that most people do not realize that government spending is simply giving people money whether they do anything useful with it or not and still the governments of the US, Japan, and Europe want us to believe that our economies will grow faster if we keep taking more money from the workers and give that money to the government.

Over the past week we have repeatedly exposed the BLS' shennanigans to both keep the headline unemployment rate suppressed and to generate an upward bias in the market courtesy of a "bigger than expected beat" of expectations. Granted, various semantics experts continue to scratch their heads in attempting to explain a collapsing labor force when even Goldman's Sven Jari Stehn just predicted that it will drop to 63.1% by the end of 2012 (and 62.5% by the end of 2015). Funny then that the US will have no unemployment left when the participation rate drops to 58.5%. And no, the "population soared argument based on revised data" doesn't quite cut it when the bulk of said surge not only did not get a job, but was not even counted toward the labor force. Yet what the biggest flaw with all these arguments that vainly (and veinly) attempt to defend the US economy as if it is growing, is that they focus exclusively on the quantity of jobs, doctored or not, and completely ignore the quality. We have decided to step in and fill this void.

Luckily they are easy to spot: the demagogues, the manipulators and the hired claqueurs. Unfortunately, there is no lack of media willing to provide a platform to perform their insidious game. “We need more, not less, government spending to get us out of our unemployment trap. And the wrong-headed, ill-informed obsession with debt is standing in its way.”How can a Nobel-prize carrying economist, who is presumably smart, write such nonsense? “He knows better”, says Jim Rickards (author of “Currency Wars”). And that makes Krugman so dangerous. Decision makers will reference his “debt does not matter” mantra over and over again – until it’s over. Thank you, Mayfly. You really understand debt – and how to make others believe it doesn’t matter.

The $10 trillion global black market is now the world’s second largest and fastest growing economy.

That after last year's abysmal performance on Wall Street, best summarized by the following quarterly JPMorgan Investment Banking revenue and earnings chart, bonuses season would be painful should not surprise anyone. But hardly anyone expected it to be quite this bad. The WSJ reports that Morgan Stanley, likely first of many, will cap cash bonuses at $125,000 and "will defer the portion of any bonus past $125,000 until December 2012 and December 2013" with bigger 'sacrifices' to be suffered by the executive committee which, being held accountable for the collapse in its stock price, will defer their entire bonuses for 2011. Morgan Stanley is likely just the beginning: "As banks report fourth-quarter results this month and make bonus decisions for 2011, total compensation is likely to be the lowest since 2008." This means that once Goldmanites get their numbers later this week, we will likely see a mass exodus for hedge funds which remain the only oasis of cash payouts on Wall Street. Alas, unlike the Bank Holding Companies, a series of bad decisions will result in hedge fund closure, as the TBTF culture will never penetrate the stratified air of Greenwich, CT. And with bonuses capped at about $80K after taxes, or barely enough to cover the running tab at the local Genlteman's venue, the biggest loser will be the state and city of New York, both of which are about to see their tax revenues plummet. And since banker pay is responsible for a substantial portion of Federal tax revenue, look for Federal tax withholding data in the first few months of 2012 to get very ugly, making America even more responsible on debt issuance, and likely implying the yet to be re-expanded by $1.2 trillion debt ceiling will be breached just before the Obama election making it into the biggest talking point of the election cycle.

Former Greek PM, and career politician, George Papandreou, is effectively retiring. Per Reuters: "Greece's former prime minister George Papandreou told his PASOK socialist party on Wednesday that he will step down as party leader and not seek re-election, a socialist deputy told Reuters. "He told us that he will resign as PASOK leader and that he will not run for prime minister again," said the deputy who attended a party meeting on the leadership succession. Papandreou stepped down as prime minister in November last year to make way for a coalition government to help Greece exit its biggest financial crisis in decades." Nothing like scurrying away in the last lifeboat just as your country is caught in the 21st century equivalent of the 22nd Catch, where your tax collectors, so critical for procuring the much needed tax revenue (sorry Greece, only America can "print" its revenues) are on what seems to be perpetual strike.

In our attempts to simplify the comprehension of the ongoing serfdomization of the US population, we would like to present one of the more persuasive charts which the administration would likely be loath to demonstrate. Having collated monthly data from the FMS' Daily Treasury Statement on incremental tax revenues (individual, gross), and new debt issuance, we observe the following rather surprising pattern: since September 2008, or the month when capitalism collapsed, and the Fed, and ever other global Central Bank had to step in as a backstop of last recourse to the western way of life, the US government has undertaken the most peculiar matching program: simply said, for every dollar of individual tax revenue, the government has issued just over one dollar of incremental debt. In other words, in the past two years, tax revenues alone would have proven insufficient by over half to fill the budget gap. In yet other words, the US Treasury is now the functional equivalent of the entire US population and then some, when it comes to keeping the US economy afloat. From another perspective, with an average take down of roughly 50% of each recent auction by Indirect bidders, nearly a quarter (half of half) of US budget deficit needs is funded directly by foreigners. Should (in)formal trade wars escalate, and should the US see an embargo of foreign debt participation, then overnight a quarter of US spending will be unfundable: this includes such critical key expenditures as defense and social security spending. Also, it is important to recall , that of the $3.35 trillion in debt issued over the prior two year period, the Fed has directly (via UST purchases) and indirectly (via MBS purchases, and thus the forced rotation of MBS securities into UST securities for agency holders such as PIMCO) purchased the other half. Thus between foreigners, and the Fed, the US consumer's traditional contribution to funding the US economy has been diluted by half. And unfortunately, as the chart below shows, absent some dramatic deux ex machina, there is no chance this trend in which US debt issuance is the functional equivalent of taxpayer contributions, will ever end.

Hopefully the administration by now has realized that unless it wants uprisings (either metaphoric or literal ones) it has to tackle the state situation. As today's Census Bureau update points out, and corroborates our earlier findings on the withoolding tax plunge, usually used to fill both State and Federal coffers, total state revenues dropped by 16% to $1.678 trillion, even as total expenses increased by 6.2% to $1.736 trillion.

An interesting observation courtesy of Mint: of the 307,868,280 Americans out there, which compose 151,485,000 tax units, 46.9% will have zero federal income tax liability in 2009. Brilliant plan to keep the country happy: the poor pay no taxes, the rich get a massive stock market bubble to sell into, and the disappearing middle class...well, they can pay $20 for a hotdog and beer combo in Prague on that once-every-five-years vacation.

State tax collections for the fourth quarter of 2008 declined by 4 percent from the same quarter a year earlier, according to a new report by the Rockefeller Institute of Government. After adjusting for inflation, combined state and local sales tax revenue declined more in October-December 2008 than in any quarter since 1959. Early figures for state tax revenues in the first quarter of 2009 show an overall decline of more than 12 percent compared to a year earlier, a further dramatic worsening of fiscal conditions nationwide.