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Generational Dynamics Web Log for 11-Jul-06
To everyone's surprise, tax receipts skyrocketed in 2005, lowering the deficit

Web Log - July, 2006

To everyone's surprise, tax receipts skyrocketed in 2005, lowering the deficit

Similar surprises occurred in 1996 and 2000

Tax revenue from corporations and wealthy investors rose steeply in 2005, catching everyone by surprise.

Needless to say, the air is thick with political spin. The White House press release attributes it to "strong economic growth and fiscal discipline," which is silly because economic growth has been weak, and there's no sign of fiscal discipline anywhere in Washington. The Democratic National Committee press release says that "the Administration that inherited record surpluses has turned them into record deficits," and that's also silly because the problem began in the Clinton administration.

Federal income and outlays as percentage of GDP - 1930-2005

Federal income and outlays as percentage of GDP - 1930-2005

The above graph shows the federal budget income and outlays as a percentage of the GDP (Gross Domestic Product), going back to 1930. As you can see, government outlays reached 44% of GDP during World War II, but then settled into the 15-25% range since then. Outlays today are around 20% of GDP, about average by historical standards since World War II.

Now let's focus on the last 25 years:

Federal income and outlays as percentage of GDP - 1980-2005

Federal income and outlays as percentage of GDP - 1980-2005

What this graph shows is that the current high deficit is not caused by exceptionally high spending, even with the Iraq war going on. It's caused by a steep drop in receipts that began in the year 2000.

My main reason for wanting to post this graph is to show that what's going on could not possibly have had anything to do with any politician, and that all political spin is nonsense.

So now we have three surprises in the last ten years:

In the State of the Union speech in January, 1996, President Clinton announced that "The era of big government is over," believing, as most people did, that high deficits were forcing government cutbacks. Everyone was shocked when corporate tax receipts rose steeply, apparently because of the beginning of the huge 1990s stock market bubble.

Since 2000, tax receipts dropped sharply, every year through 2004. This generated high deficits, but could not possibly have been caused the current administration because it began in the previous administration.

Now we have a new surprise, with tax receipts recovering slightly. The administration is taking credit, but it's much more likely related to the recent stock market, real estate and commodities bubbles.

The collapse in tax receipts since 2000 appears to be related to the loss of jobs to China and India since then. A factory in America pays taxes to America, while a factory in China pays taxes to China, so the massive shift of jobs to China and India would explain the drop in tax receipts.

The unexpected rise in tax receipts in 2005 is not substantial, and cannot be expected to continue. As we've previously discussed, corporate earnings have increased at more than double historical rates of increase during the last 10-20 years, and by the principal of mean reversion, earnings must drop sustantially, possibly this year.

From the point of view of Generational Dynamics, we're entering a new 1930s style Great Depression, as I've been reporting since 2002. The major surprises in tax receipts are all related to the generational patterns triggered in the 1990s when the generation of senior financial managers with personal memory of the horrors of the 1930s Great Depression all disappeared (retired or died) all at once, leaving behind a new generations (Boomers and Xers) with little or no instinctual ability recognize risky investments. (11-Jul-06) Permanent Link
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Generational Dynamics Web Log for 11-Jul-06 To everyone's surprise, tax receipts skyrocketed in 2005, lowering the deficit

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Generational Dynamics Web Log for 11-Jul-06
To everyone's surprise, tax receipts skyrocketed in 2005, lowering the deficit