By Charles Biderman
Happy New Years to all, and to all of you a better 2013 than 2012.
This week TrimTabs.com/blog will start carrying a table tracking US pre-tax and after tax income in real time. Our blog site will become the sole web source for US income. I am hoping that after-tax income replaces GDP as the best way of tracking the US economy. The only reason GDP is currently being used is that the US government in its infinite idiocy refuses to use available real-time data on income and instead relies upon a severely flawed methodology. GDP barely tracks 60% of the US economy, misses most of the service sector and is nowhere near real time.
Two caveats. One, our data does not adjust for inflation as of yet, but will soon. Two, actual capital gains are only available through 2010. For the record, the income data on the blog from before 2010 comes from the IRS web site. Therefore, the Bureau of Economic Analysis does have accurate wages and salaries data for 2010 and before. But the BEA data does not includes capital gains, nor does the BEA even attempt to use the recent real time data that is available. The BEA’s most recent national income reports are based upon months old quarterly state unemployment reports that are modified by the Bureau of Labor Statistics surveys to guess at current wages and salaries.
As some of you know, TrimTabs Investment Research since 1999 has been tracking daily-withheld income and employment taxes and all other individual income tax payments as reported in the Daily US Treasury Statement. To come up with our table we combined and compared our historic tax payment data with IRS income tax returns from 1999 through 2010. The 2010 returns were just posted on the IRS web site last month, two years in arrears. You can find historic income data on the IRS web site by downloading Table A from the following link:
It is hard to believe, but the fact is the IRS is apparently not interested in after tax income – what is left for Americans to spend after income and employment taxes are deducted. These all-important numbers, which are the real indicators of the direction of the economy, are virtually impossible to derive from the IRS’ summary of all returns. Therefore, to come up with historic after-tax data, I subtracted actual income and employment tax payments from all pre-tax income and then added back IRS reported refunds. If any of you have questions or concerns about how I came up with our income table, please send me a comment.
So here is what the data is saying now. The best-case scenario is that we are starting 2013 with very low income growth , and at worse in a recession. A recession, in terms of income, is lower year over year after-tax income. Since the November election, incomes actually surged a bit. But don’t get too excited. I believe, the surge had little to do with an improving economy, but was the result of those who were front running fears of 2013 tax hikes by taking 2013 income and bonuses in 2012. While that has boosted Q4 2012 income by over 6% year over year, it also means that this year’s income will be correspondingly lower.
Add in $100 billion in higher taxes from eliminating the payroll tax credit, $40 billion from Obama Care and $60 billion from higher income taxes on upper brackets and the US economy is starting out the new year on its butt. Yes, conventional wisdom says the US economy has been improving, led by real estate. But in reality, after seasonal adjustments, single family home sales have been growing modestly sequentially since the summer. But no sustained real estate boom is likely anytime soon for two reasons. One, mortgage rates are now as low as they can get. That’s because the handful of banks that control the mortgage market are unwilling to lower rates any further. Two, most potential homebuyers cannot qualify for new mortgages to kick start increases in housing prices that boosted incomes in 2005, 2006 and 2007.
Going to the table, first notice that after tax income dropped to $6.1 trillion in 2009 from $7 trillion in 2007. The reason for this is that capital gains plunged to $231 billion in 2009, a drop of $664 billion from the all-time peak of $896 billion in 2007. Capital gains rebounded to $364 billion in 2010 – the last year we have IRS numbers. So while wages and salaries only grew 1.7% in 2010, total income did pop by 7%, a relatively healthy gain.
So while wage and salary growth has been relatively puny even before inflation averaging about 5% annually in 2011 and 2012, a pop in capital gains has been boosting overall income. In other words, higher asset prices have been translating into higher after-tax income.
Going forward, that leaves us with one key question: Can Federal Reserve polices continue to levitate stock prices? Up to now, the Federal Reserve has been the prime mover behind higher stock prices , presumably by lowering interest rates to virtually zero. But now that the rates are at zero, can stock prices still go higher? We do not think so, but of course we are assuming that the Fed is not doing anything more specific to boost stock prices, other than keeping interest rates at zero.
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