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Weekly Economic Commentary


Kasriel’s Parting Thoughts – The Cyclical Macroeconomic Impact of Taxmageddon 2013

April 16, 2012

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As you file your 2011 federal income taxes, you are being bombarded in the media with frightening talk about an impending Taxmageddon befalling us as we wake up on January 1, 2013. Of course, if some of the more apocalyptic predictions of the coming end on December 21, 2012, of the “Long Count” Mayan calendar come to pass, then we will not have to concern ourselves with Taxmageddon 2013. But assuming that most of us will be around for January 1, 2013, what is Taxmageddon all about and what will be its cyclical macroeconomic impact on the U.S. economy?

At midnight on December 31, 2012, the current federal personal income tax rate structure will revert to the structure that prevailed at the close of the Clinton administration. And among other things, tax rates also will go up because of the additional taxes on investment income as part of the Affordable (Health) Care Act. All told, tax revenues will increase by about $500 billion in 2013, which is about 3.2% of the Blue Chip survey average forecast of 2012 nominal GDP. Moreover, because of the federal budget agreement, more like, disagreement, arrived at by Congress toward the end of 2011, federal discretionary outlays, including defense outlays, will be pared significantly beginning in calendar 2013.

Wow, “sucking” this much money from the economy via revenue increases and expenditure decreases is a Keynesian’s worst macroeconomic nightmare. But, if you are not a Keynesian and “follow the money,” you will have sweet dreams. To simplify things a bit, let’s assume that the folks paying more taxes in 2013 were the same folks who would have bought the US bonds in 2013 to finance federal spending. Instead of lining up to purchase as many bonds in 2013, they purchase $500 billion less but pay $500 billion more in taxes. Either way, they were going to cut back their spending by $500 billion. Either way, won’t that $500 billion being “sucked” out of the economy lead to lower total spending in the economy? Not unless the Treasury decides to let its cash balances increase by $500 billion. But, assuming the Treasury spends the $500 billion, then it will be “recycled” back into the economy. The net effect of all this on total spending in the economy? Zero!

But wait. Because of the legislated cutbacks in federal spending, the Treasury will not spend the full $500 billion it sucks out of the economy through increased taxes. Yes it will. What it won’t do is borrow as much if it cuts back on spending. So, those folks who otherwise were going to lend to the Treasury in 2013 will now find themselves with excess investable funds on their hands. They have three choices with which to do with these excess funds. Choice One would be to lend these funds to some other entity – a household, a business or a state/local government – that wanted to buy something. Choice Two would be for the potential lender to decide just buy something herself. Or Choice Three, just hold on to the funds via a deposit at Northern Trust. Only Choice Three would result in a net decline in spending in the economy if the federal government spends and borrow less.

Now, of course, I have simplified the argument in order to show the macroeconomic impact on total spending in the economy. If you had not intended to contribute to the federal government’s solicitation of funds via bond auctions in 2013 and instead are coerced into contributing via a higher tax rate, then you might see 2013 as Taxmageddon. But when we sum across all “yous,” it is a wash when it comes to the macroeconomic impact on total spending on the economy. Those who are forecasting much slower growth in US GDP in 2013 could turn out to be correct, but not because of Taxmageddon 2013.

Paul Kasriel’s Parting Thoughts: Seniors Worried about the Debt They Are Passing on to Their Heirs? We Have Met the Enemy and It Is Us!

I recently celebrated my 65th birthday, which allowed me to become eligible for Medicare. On May 1, I will begin collecting Social Security benefits. I was curious to see what has been happening to combined federal expenditures on Social Security and Medicare in relation to total federal expenditures excluding those for national defense. My curiosity was satisfied by the data in Chart 1. Back in FY 1979, combined Social Security and Medicare expenditures represented 33.7% of total federal nondefense expenditures. In FY 2011, this percentage had risen to 42%. Using current law, the Congressional Budget Office projects that in FY 2022, combined Social Security and Medicare expenditures will represent 51% of total federal nondefense expenditures. So, we seniors have been in recent years and will continue to account for larger and larger absolute and relative amounts of federal government expenditures.

Chart 1 - 04 16 2012

At the same time that we seniors are accounting for more government spending, our tax burdens have fallen. The effective federal tax rates for the middle, second highest (fourth) and highest quintiles of household income are shown in Chart 2. (Effective federal tax rates measure the tax burden on households. These rates are calculated by dividing taxes paid by or imputed to households by their comprehensive household income. Federal taxes include individual income, corporate income, payroll and excise taxes. Individual income taxes are generally distributed directly to households paying those taxes. Social insurance, or payroll, taxes are distributed to households paying those taxes directly or paying them indirectly through their employers. Corporate income taxes are distributed to households according to their share of capital income. Federal excise taxes are distributed to them according to their consumption of the taxed good or service.) For the middle and fourth quintile household incomes, effective taxes are near the lowest in the post-WWII era. For the highest quintile household income, the only time in the post-WWII era the effective tax rate was lower was during the Reagan administration.

Chart 2 - 04 16 2012

Chart 3 shows the total federal debt divided by the number of U.S. residents under the age of 65. In a sense, it is the federal debt we seniors are “leaving” to each of our children and grandchildren. Back in 1979, seniors “left” about $4.2 thousand of federal debt to each of their children and grandchildren. By 2011, we seniors had left about $55.9 thousand of federal debt to each of our children and grandchildren.

Chart 3 - 04 16 2012

So, although I am worried about the federal debt I am saddling my descendants with, I am playing a large role in the cause of my worry through the collection of Social Security and Medicare benefits and the historically-low tax rate I am paying. What’s a worried senior to do? Leave the kids and grandkids a big inheritance. In other words, stay at home in the winter rather than taking that cruise and eat at home more rather than hitting the early-bird special at your local dining establishment. Because I am the beneficiary of the increased federal debt that is being piled up, perhaps I should be the one to sacrifice a little today for my beneficiaries of tomorrow. Nah. It is more fun to complain.

Paul L. Kasriel, post April 30, econtrarian@gmail.com


March Retail Sales – Decent Widespread Gains
by Asha Bangalore

Retail sales rose 0.8% in March, following a 1.0% increase in the prior month. In the first quarter, retail sales have posted an 8.0% annualized gain compared with a 7.8% increase in the fourth quarter. Gasoline price hikes account for a part of this increase of retail sales in the first quarter, while recording a 1.1% increase in March. Gasoline sales moved up nearly 16% in the first quarter vs. a paltry 0.5% increase in the fourth quarter. Excluding gasoline, retail sales rose advanced 0.7% in March, matching the increase seen in February. For the quarter, retail sales excluding gasoline have increased at a 7.1% annual rate vs. an 8.8% jump in the fourth quarter. The main message is that the momentum of consumer spending remains at a satisfactory pace and it is most likely to post a gain of a little above 2.0% in the first quarter.

Chart 4 - 04 16 2012

The details of the retail sales report show an increase in sales of furniture (+1.1%), building materials (+3.0%), apparel (+0.9%), general merchandise (+0.7%). electronics and appliances (+1.0%), and sporting goods (+0.5%) during March. The 0.9% increase in auto sales contradicts the unit auto sales numbers which showed a drop in auto sales during March (14.4million units vs. 15.1 million units in February), but the quarterly sales pace for autos (+35.6% vs. +36% in 2011:Q4) is impressive and should make a positive contribution to consumer spending in the first quarter.

Table 1 - 04 16 2012












The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.