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Monday, May 18, 2009


more on tax revenues

following on earlier comments -- via zero hedge, an assessment of federal government receipts by david galland of casey research.

Here’s what’s going on:

  • In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.
  • Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!
  • When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

... What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper. ...

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

alternatively, they can force the capital markets for corporate bonds and equities to vomit out the requisite funding with an end to the short squeeze and a return of the fear trade. but it seems altogether too reasonable to say that the treasury's funding demands in support of wealth transfers and balance sheet expansion are getting far ahead of the kind of cash flow funding that can be provided by household and corporate deleveraging and saving. the result has been rising rates on the long end that -- with apologies to caroline baum -- may or may not be indicative of a positive yield curve signal.

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Based on the tax returns I prepared, admittedly a small sample, and comparing them to last year, it would not surprise me if individual tax receipts for the Feds were down 10-15% from last year and corporate receipts at least 20%.

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I suppose a meaningful chunk of tax revenue in prior years was likely directly attributable to ponzi-economy earnings and unsustainable capital gains from illusionary wealth. And the increased savings rate won't be able to fund this chunk at any point, so that is a bearish factor for treasuries.

Still, with only 3% of big money investors bullish on treasuries and the S&P P/E ratio at 25-122 depending on how you measure it, a return to the "fear trade" seems like it has room for a pretty violent move, depending on where stock dividends are headed...

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Don't forget the dwindling State coffers. The only place they will find as a source of new supply is the FED printing press.

They already have plans to backstop municipal bonds. That is no different than Fannie or Freddie direct purchases.

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I thought the chart of revenues posted with the ZeroHedge article was particularly enlightening. Also, at Matt Trivisono publishes a daily comparison of actual withholding tax receipts (data is put out by the Treasury, if you want to go to the source). Both of these show the same result--tax revenue is collapsing. The problem lies in understanding how it will ever begin to increase in any meaningful way--wages are not rising nor are likely to, and the number of people employed is not likely to increase in any significant way in the next ten years, given the demographic hurdle of the aging population. I suppose taxes could be increased, but even a 10% hike wouldn't do much more than slightly narrow the gap, and it would destroy consumption.

As far as I can tell, the only other time the government ran a deficit of 50% (took in only half of the money it spent) was in WWII, and we came out of that war with pent-up demand and most of the world's manufacturing base, not to mention a population explosion--and defense spending was cut back sharply after the war. So how, pray tell, are we to narrow the budget gap now when spending cannot be cut (in any meaningful way)?

I guess we just sit around and wait for the devaluation of the dollar--although that is inevitable, it certainly does not need to be immanent. The catalyst, when it comes, will be unforeseen, and its timing cannot be predicted--kind of like the Rapture, for those who believe in such things.

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hbl, i personally think they'll have less trouble than we imagine. a lot of the short-squeeze rocket fuel for the equity rally seems to be expended.

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I suppose taxes could be increased, but even a 10% hike wouldn't do much more than slightly narrow the gap

that's the most amazing aspect. of the many people who argue that the government should be balancing its books right now, i wonder how many have actually looked at the mathematics of what they're talking about. what would have to be done would precipitate a surefire economic armageddon.

that said -- we cannot save it all. a lot of government efforts have been feeble in relation to the scope and scale of the disaster (thinking particularly about the death of shadow banking and securitization) and there's plenty of scope for continuing economic contraction even if government does everything it responsibly can with its balance sheet.

and if it proceeds irresponsibly? i continue to think that there is a non-trivial risk of a capital flight disaster, in spite of the pronounced deflationary dynamics. i have richard duncan's book on my shelf at home from 2003 or so -- it's high time to reread it, i think.

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i see today john hussman has some comments on the necessity of the continuing fear trade.

The second fact is that as a result of more than a trillion dollars of new issuance of Treasury securities with relatively short durations, it is a tautology that there is a mountain of what is mistakenly viewed as “cash on the sidelines” invested in these securities. This mountain of “sideline cash” exists and must continue to exist as long as these additional government securities remain outstanding. It is an error to view outstanding debt securities as if they are “liquidity” poised to “flow back into the stock market.” The faith in that myth may very well spur some speculation in stocks, but it is a belief that is utterly detached from reality.

one of hussman's key points is that the fed will have difficulty soaking up funds in the event of a spate of credit creation because, having recharacterized the balance sheet of the major banks by swapping junk assets for short-term treasury paper at near-par, it will end up only being able exchanging money for something very money-like thanks to repo.

that credit creation event is not nearby, imo, but this could be a big issue eventually.

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