BNY ConvergEx: "For Every $1 Of Proceeds From Taxpayers, The Federal Government Issues More Than $1 In New Debt"

In his Friday commentary piece "Tax and Spend. And Spend", Nicholas Colas of BNY ConvergEx read our mind and posted this concise summary on the comparison between 2009 and 2010 tax withholdings, and the unique dynamics thereof. Whereas we will present a detailed analysis of this comparison shortly as there have been numerous interesting themes to discuss, we present the following piece from Colas as a great backdrop to our soon to be posted results. And for all those claiming the tax picture in the US is improving (we are looking at you Daniel Gross), here is the simple reality of the situation: "Simply put, for every $1 of proceeds from taxpayers, the Federal government issues more than $1 in new debt." Must read for all "improvement-ists", especially since Colas references the holy grail of all financial reporting: our all time favorite necessary and sufficient DTS.

Tax and Spend. And Spend.

Summary: You may not look at them very often, but that myriad of deductions on your paystub (who knows what OASDI even is?) are actually a powerful – and overlooked – tool to understand the state of the U.S. economy. The U.S. Treasury publishes a daily report that includes how much it is receiving in “withheld income and employment taxes”, making this a virtually real-time look at labor markets and trends in wages. The good news: individual withholding/tax  receipts are virtually flat to last year for the first half of 2010, up 0.2% to $845.3 billion. Even though the Bureau of Labor Statistics estimates there are 900,000 fewer workers now than a year ago, tax receipts are flat, which means wages are up close to 1%. The bad news: the U.S. has issued $892 billion of incremental Federal debt over the same period. The country has some modest offsets – corporate taxes are recovering, but year-to-date revenues from this source are only $149 billion. Simply put, for every $1 of proceeds from taxpayers, the Federal government issues more than $1 in new debt.

My undergraduate degree was Near Eastern Archeology, so I enjoy finding little pieces of the past in ordinary modern life. Yesterday was payday at ConvergEx, and in perusing the twice-monthly paystub I found such a historical artifact. It is probably on your paycheck as well, labeled “OASDI.” It stands for Old Age, Survivors, and Disability Insurance. A neatly non-politically correct phrase there, and not surprisingly so, given that the term goes all the way back to the Great Depression. Now it would probably be called something else, but its archaic, 1930s name has stuck and everyone with a paycheck has a hidden reminder of a time when the country’s older citizens often lived in the most meager of conditions. You know OASDI by its other name – Social Security.

The U.S. Treasury collects not only Social Security, but Medicare and Federal Tax Withholding on a daily basis. It also publishes a report containing not only these receipts, but also corporate tax payments, proceeds from bond issuance, and all the major categories of the Federal budget. You can see it here:

We find the Treasury’s Daily Statement especially illuminating because it publishes exactly how much money it is receiving from the taxpayers of America each and every day. Since the vast majority of the “Withheld Income and Employment Tax” line comes from payrolls, it is in effect a very reliable barometer of current employment and wage trends. Far better, to my thinking, than the endlessly revised monthly Employment Situation report or the seasonally adjusted weekly Initial and Continuing Claims for Unemployment.

For the first six months of 2010, “Withheld Income and Employment Taxes” – and by extension the U.S. labor market - is essentially flat with last year’s first half, up 0.2%. That fits with some of the less robust data we alluded to above – the U.S. workforce is basically stagnant year-on-year at 139 million employed Americans. Strictly by the BLS data, there are actually 919,000 fewer employed people now than last year, so the up 0.2% actually shows that wages are up about 1.0%. And if you want to get really wonk-ish with the numbers, the first half of last year had some modestly higher withholding rates, equivalent to about 1.0% more wage growth in 2010. But no matter how finely you cut the data, the upshot is pretty clear – the labor market is about the same place it was in 2009. Disappointing, given the rafts of monetary and fiscal stimulus injected into the economy, but that’s where we are.

As for corporate tax receipts, these are on a better upswing for the year-to-date, up 33% for the first six months versus the same period last year. That speaks to better corporate profitability thanks to stringent cost cutting/layoffs in 2009. The fly in the ointment, as it where, is that what you learned in economics class is pretty much true: companies do not pay taxes. At least not very much of them. For the first half of 2010 Treasury booked $148 billion of corporate taxes. Individual taxpayers – people, not companies, paid almost six times this amount - $845 billion – in the first half of the year.

This leads us to a second reason why the Daily Treasury Statement is a useful document – it shows the degree to which the Federal budget squares up in terms of inflows and outflows. Think of it as Uncle Sam’s checking account. I think we all know the picture isn’t pretty here, but a few points to put some context around the problem.

  • We already know several important numbers – “people” tax receipts YTD of $845 billion and “corporate” tax receipts of $148 billion. Tax refunds for the calendar year thus far have been $371 billion, mostly to individuals. So the country’s tax receipts, round numbers, are $622 billion year to date. There are some miscellaneous other income lines – excise taxes primarily, that add about $35 billion. Total, total: $657 billion in taxes/withholding.
  • In the same period of time – the first 180 days of 2010 – the U.S. Treasury has issued some $892 billion in incremental debt. Almost all of it was issued to the public, rather than the customary practice of selling a piece to the Social Security system. That was not by choice – the reduced amount of withholding we outlined above means that Social Security has not had any material inflows of new money to invest in 2010. So all that newly issued debt – much of which went out as short term Treasury Bills – will need to be “rolled” as it matures. That means it has to find new buyers every 3, 6, 9 or 12 months.

We think this comparison neatly sums up the bind the U.S. still finds itself trying to disentangle. Through the first half of 2010 new debt is over 33% larger than tax and withholding income. Yes, there are some other ancillary sources of reported income in our Daily Treasury statement – State reimbursements for unemployment insurance, Federal Reserve Bank earnings and the like. But even when you lump every piece in, the ratio of taxes/withholding to new debt is still not one-to-one. For every dollar of withholding, the government issues more than one new dollar of debt to fund its total expenditures.

Economics is the study of how societies allocate inherently scarce resources. Even this brief outline of taxation and government spending makes me think that the scarcest resource of all might just be common sense.

from Nicolas Colas of BNY ConvergEx