February 12, 2007

January’s Treasury Report: Supply-Side Econ Rocks On; Surplus in FY09 Appears to Be More Than Possible

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 5:05 pm

Note: This post has been moved to the top for the rest of Monday.
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Here we go again — Another blockbuster month for tax collections, and another month of the deficit trending sharply downward:

TreasRecsOutlays0107

As noted at this post earlier today, the predictions were for a January surplus of $40 billion, and the $38 billion-plus result is pretty close to that. It would have been even better, but January 2007 spending was over 6% higher than January 2006. Even with spending control slipping a bit, the deficit is 57% lower through the first four months of FY07 than it was at the same time in FY06. Wow.

Both Brian Wesbury (whose predictions I mentioned this morning) and yours truly have to admit to being wrong so far this year on revenue growth. We both have been thinking (Wesbury here, BizzyBlog here) that it’s going to come in at 9%, but as you see, through four months it’s actually pushing 10%.

The revenue bonanza should not have been totally unexpected. There were a few clues that January tax receipts would be very strong:

  • The Google founders’ massive capital gains payments to the State of California, which probably required even bigger payments to Uncle Sam.
  • Other similar but smaller “high tech gold” from the likes of Oracle and Cisco mentioned in the same article as the Google windfall, which again would be expected to have a federal equivalent.
  • The secret settlement of a $200 million tax bill with the state of California (this was governor Arnold Schwarzenegger’s lucky month, wasn’t it?). This could also have reflected a settlement made at roughly the same time with the IRS.
  • In the bigger picture, a pretty good 2006 in the equity markets should have compelled many of those who sold at a profit during the year to ante up their payments by January 16 to avoid tax penalties and interest when they file their 2006 returns.

The belief that the federal budget will be in a surplus situation in the fiscal year when President Bush hands over the keys to the White House in January 2009 has a lot more credibility now than four months ago when I first suggested that it might very well happen.

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UPDATE: Now ask yourself — If Google’s founders, instead of paying about 25% tax on their capital gains (10% state and 15% federal) had faced combined federal/state capital gains taxes of about 30% (with federal increasing to the 20% level it was at before the Bush 2003 tax cuts), what are the chances they would have done something to minimize the tax impact? None? What if the rate were 45% (increasing the federal to the current 35% top ordinary-income rate)? It’s hard to believe that they wouldn’t have done something to avoid or somehow minimize the payments at that level of taxation.

But instead, they (and obviously so many others) have settled up with Uncle Sam and, if applicable, their state, and moved on. Now they and others are free to put their remaining capital to what they believe will be its highest use(s) — i.e., the one(s) with the best potential to yield the highest long-term returns. The better deployment of capital by smart people will most likely enable the economy to grow faster than it would have if the capital had remained locked in by high tax rates. What’s not to like about that?

UPDATE 2: Governor Schwarzenegger should be especially grateful that his state has a better real climate than Nevada, and that The Sagebrush State doesn’t have a business equivalent (in size and scope) of Silicon Valley. If Nevada ever achieves a high-tech critical mass, the Golden State may be in dire straits.

UPDATE 3: To give credit where truly due, Skeptical Optimist, who I hope has recovered well and fully from surgery, has been predicting that the budget would get to a breakeven situation by various times within fiscal year 2009 for some time now, with an outside chance that true surpluses might begin during the latter stages of the 2008 presidential campaign. (Update 3A, Feb. 13SkepOp’s latest post [Feb. 13; HT Ironman in a comment at another post] is projecting that the budget is on track for balance in June 2008.)

UPDATE 4, Feb. 13: What Happens If a Deficit Falls and Almost No One Reports It?

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