The Bush Supply-Side Tax Collections Boom Is Over
Here are key full-month figures from Uncle Sam’s Daily Treasury Statement for January 31, compared to the January 2007 statement:
The decline in withholding collections is an unimportant timing difference having to do with the number of high-collection Mondays (four) compared to January 2007 (four). It’s the net amount of the other three big items (corporate and non-withheld income taxes, less refunds) that is more troubling. Their combined $68.9 billion in January 2008 is almost exactly the same as January 2007.
The message: The engine of entrepreneurship is currently on idle.
Based on the chart above, it wasn’t a surprise that, indeed, The Monthly Treasury Statement released on Tuesday showed January receipts declining by 2.1%:
Both the January and year-to-date results tell us that the dramatic supply-side driven increases in tax collections (44% in the four years ended September 30, 2007) are definitely over.
With the passage of the so-called stimulus package, it’s a virtual certainty that the reported full-year deficit (which, it should be remembered, is much lower than the real deficit, as discussed here previously; an example showing the true deficit is in the middle of this October 2006 post) will be much higher than last year’s $163 billion.
The stimulus package isn’t all bad, as noted here in late January (first item at link). But what’s really lacking is even the slightest commitment to getting the economy going again — which would, as a side effect, increase tax collections.
The economy slowed in the fourth quarter, and continues to slow, from nice levels of growth (3.8% and 4.9%) in the two previous quarters. The difficulties in the housing market and the subprime mortgage lending industry are not the only contributors. A factor that is at least as important is the fact that in 2010, a mere 23 months from now, most federal income tax rates and many other provisions of the tax law that directly or indirectly affect investor behavior will return to their 2000 and prior levels.
Unless Congress makes the current tax system permanent. What Nancy Pelosi, Harry Reid, et al. should be discussing is cutting marginal tax rates further, by perhaps 10% across the board (e.g, the top rate would come down to 31.5% from 35%, while the lowest rate would go from 10% to 9%). Dream on.
What we have is long-term investors pulling in their horns at the precise moment that we should be encouraging them to sustain their economy-growing activities. Investors know full well that key members of the current congressional majority want to raise taxes even beyond what will kick in starting 1/1/10, and that those further tax increases are a virtual certainty if a Democrat takes over the White House next year. Unless conditions change, the looming “automatic” 2010 tax increase and the prospect of additional taxes that would likely be imposed by a Democratic administration will, I believe, suppress economic growth for the foreseeable future, making a recession (which I believe we will avoid, but perhaps not by much) more likely.
Anyone waiting for another across-the-board rate cut is, unfortunately, going to be waiting a long time. Based on what he has said so far, the best we can hope for from a would-be President McCain is that he would hold the line on rates, including those put into place in 2003 on capital gains and dividends.
Somebody needs to deal with the spending side, too.
Spending in fiscal 2007 (the 12 months ended September 30, 2007) was only 2.8% higher than fiscal 2006 (see the last item at this post). Since that spending was driven by the budget passed during calendar 2006, it’s fair to say that the 109th Congress, though much-maligned, did a pretty decent job of keeping spending under control for one year. If only they hadn’t waited until then to get spending religion, because by the time they did, their perception as out-of-control spenders had been accurately planted.
The current fiscal year is off to a rocky start. Given who’s in control, should be laid at the feet of Pelosi, Reid, and President Bush. The 8%-plus increase in spending noted above is not sustainable, especially given the $100-billion plus in checks that will be going out to taxpayers in the coming months. This kind of spending increase is the kind of thing that should be driving departmental spending and hiring freezes instead of the endless calls we are hearing for new programs and expansions of existing ones.
Just as the near-doubling of tax collections that occurred during the Reagan Era was overwhelmed by out-of-control spending by Tip O’Neill and his congressional compadres, no supply-side stimulus can hope to collect enough money to keep up with spending increases of the kind seen during the past four months of this fiscal year.
Tom Blumer is a CPA based in Mason, Ohio, outside of Cincinnati. He presents personal finance-related workshops and speeches at companies, and runs BizzyBlog.com.
This column, in the apparent name of pro-Republican partisanship, shows a profound lack of insight into what’s afoot in economic terms.
1. The foundational problem is fiat currency and economies based on the “stimulus” of more such paper currency to whip the flagging paper economy into yet higher levels of addiction. Whenever things lack “growth” Wall Street demands another infusion of invented money and off to the races we go again. The Fed, caving to this addiction, is now only 3% above where Japan ended up a long time ago. We know how that turned out.
2. Not surprisingly, the current global credit crisis is literally the last 40 years of bogus fiscal policy crashing. You can’t keep shooting up, expecting that the next hit will make it all better.
3. Government made the depression of the twenties worse. “Conservatives” calling on government to dick around with the economy is the height of liberal thinking. It’s madness.
4. This is now a Keynesian economy. hardly the model of sanity, responsibility, and sustainability. It’s a far cry from conservatism.
It’s a tragedy economic neo-conservatives believe in pumping up bubbles in the name of indefinite “growth”. First tech, then housing, now alternative energy (seen Obama’s platform lately?) That is simply not a conservative principle, not in the age of exploding $9T debts and tanking fiat-currency economies.
If you watched Glenn Beck last night, you heard from his guest expert that the only economy that will be stimulated by this package (3 ways!) is that of the People’s Republic of China.
The only thing any “progressive” government can do to an ecomomy is kill it, especially if it views business as the supreme enemy of the (do it for the children) sheeple (a la Billary). Tax it to death, and make everyone equally miserable and poor.
Or in this case, mortgage my grandkids with 150 billion in Chineese debt.
The foundational problem is fiat currency and economies based on the “stimulus” of more such paper currency to whip the flagging paper economy into yet higher levels of addiction. Whenever things lack “growth” Wall Street demands another infusion of invented money and off to the races we go again.
Yawn. When the Brits went on the gold standard in 1925, it triggered global deflation since because of the decline price of gold (huh? Gold’s value is not absolute?). Deflationary pressures caused British investors to sell off equities which triggered stock market crashes around the world and ultimately a global depression.
I’m not arguing for absolute value, mishu, because there is none, which we both know. You thereby present a false dichotomy.
Rather, I’m pointing out that the economy is based in bubble mentalities and fiat currency which have obvious challenges, among them the positive feedback we see unfolding. I’m pointing out that hoorah economic Republicanism is therefore obvious folly, obvious because of the evidence. Conservative? Hardly.
How so? The fundamental indicators. You can take it up with them and then, hopefully, resist isolating one aspect of goldbuggery so as to erect it only alternative argument to debt as money.
“As Paul Volcker stated in April of this year, ‘I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.’”
http://www.itulip.com/forums/showthread.php?p=4486#post4486
I agree with Ten. Somehow we now have a keynesian policy masked under tax cuts and rebate checks. After Reagan made huge tax cuts and took us away from the era of high taxes and heavy regulation, the republicans became the “good economy” party. Now they feel the need to intervene in the economy too much. Let some people foreclose. Let some people go chapter 11. Let other people who can afford it, buy the assets at a cheaper price. This is the USA. This is capitalism. We need to get back to tough love. Of course, this won’t get anybody elected in the near future.
“Ten” is absolutely correct. Furthermore, author Blumer continues the media-frenzy claim that we are entering a recession. I think Blumer is still wet behind the ears; an inexperienced juvenile scribbler with no historical perspective under his belt.
I remember when Senator George McGovern repeatedly tried to make the government the employer of last resort when the unemployment rate was nearly 10%, inflation was in double digits, and the entire economy was in stagflation.
Today, unemployment is around 5% — just above what economists call “full employment.” Inflation is benign at around 3%, and the economy is still growing [making a lie of claims of recession].
This is an election year, folks. The MSM has a vested interest in pretending we’re going through Jimmy Carter-style doom & gloom. But the stone cold reality is that the U.S. economy has never been healthier.
As long as we keep the very inexperienced Odumbo from throwing hundreds of billions of our tax dollars at a an unemployment non-problem, we’ll be just fine, folks. Relax!
My apologies, I reckon I was responding right past your point. When I see ‘fiat money’, it raises my Ron Paul red flag. Gold has just an arbitrary value as floating currencies. My point is monetary intervention is not a Keynsian. Milton Friedman advocated a central bank policy aimed at keeping the supply and demand for money at equilibrium. Sorry to be a stickler for details.
Did the Fed blink and chopped rates too fast a few weeks ago when global equity markets dropped 5%? That’s certainly arguable especially when the Fed was going to meet a week later anyway. I would have rather waited to see if the Euros were going to make a move. They had a shock to their economies that day as we did. Having said all that, I find monetarism far more reliable and flexible than tying our money to some mineral you can dig out of the ground.
As far as the stimulus package, I’m agreement. The only jobs it’s meant to protect is congress’.
The devil is in the details, folks. I appreciate the nod (and from you, mushu) but the stone cold reality is that the U.S. economy has rarely been unhealthier, Smokey.
Look, all indicators are heading the wrong direction simultaneously. Credit writedowns are in the billions, the housing collapse (which is actually the credit collapse) is only about a third finished, securities are left on auction shelves at astounding rates, local municipalities are in bankruptcy, the money supply is going exponential, gold has tripled in half a decade, oil has as well, there’s been runs on UK banks, we’re widely talking bailouts as entire neighborhoods stand fallow and major banks reel.
We have a national debt of nine trillion dollars and since all money is debt, we’ll literally never pay it back, much less the interest.
Look, folks, this isn’t rocket science (Galbraith prefers the respectability of astrology over that of economics).
We’ve been printing cash on thin air. We’ve been living on the bubbles. We don’t produce. When we start flatlining, we print more. Today we’re at only 3% over zero interest and still the addiction burns.
Nobody knows where this ends although very important financial managers are scared witless, to be sure. By now more of us should know that cheering the largely naked economy emperor because, you know, Republicans are pro-free markets, is simply nuts.
We are junkies.
Fiscal responsibility, not exactly a contemporary “conservative” virtue, simply requires monetary responsibility, a decidedly conservative principle. So where’s ours?