Government income is tanking

Thanks to Glenn Reynolds, I have found a hook to write an essay that I have been meaning to write for a few months.

JOHN GALT WRITES HOME: Federal Receipts Tank: March Tax Take Down 27.9%.

Here is the headline from the Chicago Daily Observer: Federal Receipts Tank: March Tax Take Down 27.9%

Through March, federal receipts were running 14% behind the previous year. Each month during the fiscal year has trailed the previous year, and degree of the difference has steadily increased.

There are several assumption built into the government’s projections of the deficits that are coming. Here’s a little secret that only you and I share: the deficits will be much, much bigger than current projections.

The numbers are off not because projected spending is going to be bigger than advertised, in fact it may not be possible for the feds to spend money as fast as they would like.

Deficit projections are low because tax revenues are going to plummet.

The feds collect taxes on income from various sources. The first, wages, are shrinking as people are joining the ranks of the unemployed, as companies are making across-the-board wage cuts, and as bonuses and salaries in formerly high wage areas like financial services are slashed (remember AIG?).

Second, dividend income is way, way down. GE, as an example, cut its dividend 68%. Banks – a former source of high dividend paying stocks – have all but eliminated dividends, and this is true across the board for companies who are hunkering down for a long period of austerity.

How about taxes on interest? GM is defaulting on its bonds, Citigroup is converting its preferred stock with a high coupon into common with no coupon. And that’s just the beginning. CD rates are in the very, very low single digits providing very, very skinny incomes that yield very skinny tax revenue. Interest on treasury bonds are so low some people are literally paying the government to hold their money.

And then there is the capital gains tax. I was very proactive last fall as losses mounted in advising my clients to sell and take their capital losses. That was the least I could do to turn lemons into lemonade. Now investors they have several ways of hiding their income from the tax man for years into the future. They can offset $3000 of ordinary income with accumulated capital losses. Second they can offset any capital gains for years into the future with losses they took last year, carrying their losses forward until they are exhausted. Anyone who ends up paying capital gains taxes this year or next is not well informed or advised.

The outflow side of the Federal deficit is out of control. What they Feds may not have counted on is that the income side is also out of control.