Do Not Mistake Higher Income Tax Payments For Liftoff


By Charles Biderman


In an April 30 video I said that income tax collections have been surging this year due to higher taxes, both from higher tax rates and capital gains payments resulting from sale of assets prior to 2013’s higher rates. The facts I reported April 30 are now coming to light three weeks later. The bullish twist on the news, that deficit reduction means we must have economic lift off has become an overnight feel good phenomena for those fully 100 percent long stocks.


If the drop in the deficit is a trend that will continue due to underlying economic improvement, that means that the bulls no longer have to worry about an impending stock market crash when the Fed stops printing.


If only it were the true that we are in a sustainable recovery. The actual numbers tell a different story, a tale of three one off items, masking a continuing slow growth economy.


So far this year through the middle of May, all income tax collections are up $141 billion year over year, or 14 percent. Add whatever Fannie and Freddie are giving back and Treasury revenues are up around $200 billion year over year in just four and a half months. That obviously means that the deficit is $200 billion less then last year, or a 20 percent decline. That decline has to mean the overall economy is improving.


Sorry. Not so. First, only $61 billion of the $141 billion tax collection gain came from higher withheld income and employment tax payments sent in my all employers of the 135 million US workers subject to withholding. Unfortunately only a small percentage of the increase in tax collections is the result of growth in wages and salaries. The bulk of the year-over- year pop in withholding is due to higher taxes rates. In other words, so far this year, wages and salaries before higher tax rates are growing minimally, particularly after inflation.


Second, what no one other than me has been reporting is that the bulk of the higher taxes collected this year was not due to higher tax rates, but rather to capital gains paid this year for asset sold last year to avoid this year’s higher taxes. For example, the category the US Treasury calls, Other Than Withheld Income and Employment Taxes includes all amounts paid directly by individuals to the IRS. My guess is that capital gains taxes paid this year on last year’s asset sales boosted payments by almost 30 percent, or $64 billion. That $64 billion was more then the $61 billion in higher withholding.


Third, the housing twins Fannie and Freddie benefiting from their monopoly position in the mortgage is kicking back $60 billion.


So combined higher taxes and a cash transfer is reducing the deficit by $200 billion. Unfortunately most of this is due to the one time items.


There is a bit of good new. Yes, over the past three weeks wage and salary growth has indeed picked up. But just a tad. Even at this faster growth rate wages and salaries are growing by about $300 billion or so annualized. At a combined 25 percent income and employment tax rate, $300 billion generates $85 billion a year in higher taxes, or about $30 billion of the $200 billion year to date deficit reduction..


I know this might be too many numbers for some of you. So to summarize: The budget deficit has dropped by about $200 billion so far this year and maybe $30 billion of that deficit reduction is due to income growth.


Bottom line, no sign of sustainable growth that I can see.


What is going on in the other side of ledger, government spending is also interesting. So far this fiscal year, US government spending is actually down a tad, $11 billion 0.3 percent of the $3.5 trillion budget. However, while total government spending might be down, Social Security, Medicare and Medicaid spending grew by $65 billion or almost 8 percent. As of right now social security, medicare and medicade is equal to 43 percent of the entire US government budget, and their growth rate is accelerating.


Think about it. Although overall government spending dropped a tad, entitlement costs spiked $65 billion so far this year, an amount greater then this year’s entire increase in withheld income and employment taxes even after a big spike in employment tax rates.


Look, I have been saying since the start of this year that as long as the Fed keeps creating phony money with which to buy financial assets; and as long as corporate America is not printing and selling huge amounts of new shares, stocks should keep rising.


However, that does not mean that a bull run in stock prices and a one-off decline in the budget deficit equals a sustainably growing US economy.




4 Responses to Do Not Mistake Higher Income Tax Payments For Liftoff

  1. Pam on May 16, 2013 at 2:56 am

    The question on everyone’s mind is when will the market reconcile itself with the real economy. Will it be this year or next or the one after that? What will be the straw?

    • Dino on May 16, 2013 at 7:33 pm

      “Will it be this year or next or the one after that?”

      IMO, no, no & no…

      I believe we no longer have a market driven economy due TARP and a lack of price disclosure. All gov data are deliberately ambiguous and designed to make things look less dire.

      The massive changes due to globalization have set up a permanent over supply of workers. Add in the computerization and robotics and we have a global glut of workers which grows with every new tech addition.

      It is now, and will be for the foreseeable future, a game of managing perceptions.

      Sometime down the line we will likely have another global war (politicians standard way to cover their legislative largesse) and a restructuring of wealth and debt.

    • Gordon on May 17, 2013 at 12:51 am

      You mean like Silver going to $50 and now back to 22 what is it really worth. The fed and now the bank of japan are distorting the whole world. Charles Nenner said it would start in march and now april and now may, so far he has been wrong. Mr. Biderman was screaming crash a year ago, so he surely doesn’t. Ask the Devil, for he is surely running the world and not God anymore.

  2. Pam on May 17, 2013 at 4:13 pm

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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