Taxes – Page 13 – Donald Marron

Latest Data on Transfers and Income

In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:

The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

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Federal Deficit Up to $1.3 trillion

On Thursday, the Congressional Budget Office released its latest snapshot on the federal budget. The headlines:

The budget deficit was almost $1.3 trillion during the first ten months of the fiscal year (through July). That’s up from $389 billion at this point last year.

Spending has risen 21% over last year, while tax revenues have fallen by 17%.

CBO estimates that $125 billion of the increased spending and decreased revenues are the result of this year’s stimulus act.

Deficit July

The chart shows the main drivers of the exploding deficit:

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Collapsing Tax Revenues

The Office of Debt Management at Treasury has released another fascinating set of charts about the government’s finances and debt outlook. One that particularly caught my eye was this depiction of the collapse in tax revenues:

Treasury Revenue Declines Fittingly, the red lines represent the current fiscal year.

As you can see, corporate income taxes are lagging far behind the pace of recent years, as are non-withheld individual tax payments (those payments typically stem from capital gains, other investment income, and business income rather than regular wages and salaries).

Refunds have also increased (denoted by a larger negative figure — i.e., larger cash outflows). Refunds also spiked in the middle of last year due to the first economic stimulus.

The Exploding Federal Deficit

Yesterday, the Congressional Budget Office released its latest snapshot on the federal budget. The headlines:

The budget deficit was $1.1 trillion during the first nine months of the fiscal year (through June). That’s up from $286 billion at this point last year.

Spending has risen 21% over last year, while tax revenues have fallen 18%.

For the first time in more than ten years, the government ran a deficit in June. June is a big tax-paying month, so it usually records a surplus.

Exploding Deficit - June

The charts shows the main drivers of the exploding deficit:

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CLASS Act Fails the Offset Test

If you take budgeting seriously, people sometimes think you are a curmudgeon. When I was at the Congressional Budget Office, for example, we were once denounced as anti-housing because we concluded that increasing subsidies for low-income housing wasn’t free. CBO reached that conclusion using an advanced tool known as “arithmetic”, but some advocates tried to portray it as an anti-housing policy statement.

At the risk of again appearing curmudgeonly, I would like to draw your attention to a provision in the health care reform bill being considered by the Senate HELP Committee. That provision, the Community Living Assistance Services and Supports Act, would create a new program to insure participants against some of the financial costs of disability and long-term care.

I have nothing to say about the merits of this provision, except to note that it has one of the best acronyms in legislative history: the CLASS Act.

I have a great deal to say, however, about the arithmetic of the CLASS Act, because it illustrates just how hard it will be for our legislative process to really pay for health care reform.

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Big Money in Cap-and-Trade

On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.

The following table illustrates how much revenue the bill would raise and compares it to the alternative of auctioning all the allowances:

Cap-and-trade revenues

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Stimulus Lifts Government Transfers

A few weeks ago, I posted some charts showing that Americans are increasingly reliant on government transfers as a source of income. Friday’s data on personal income for May confirmed that the trend is continuing. Government transfers made up a record 18% of personal income in May:

In interpreting this increase, it’s important to keep several points in mind:

May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May. Continue reading “Stimulus Lifts Government Transfers”

The Exploding Federal Deficit

Last week, the Congressional Budget Office released it’s latest snapshot on the Federal budget. CBO estimates that the federal budget deficit was $984 billion — just short of a trillion dollars — during the first eight months of the fiscal year (October 2008 through May 2009). During the same period last year, the deficit was “only” $319 billion. Why has the deficit been exploding so rapidly? Lower tax revenues and higher spending (yes, that’s obvious, but keep reading).

Last week, the Congressional Budget Office released its latest snapshot on the Federal budget. CBO estimates that the federal budget deficit was $984 billion — just short of a trillion dollars — during the first eight months of the fiscal year (October 2008 through May 2009). During the same period last year, the deficit was “only” $319 billion.

Why has the deficit been exploding so rapidly? Lower tax revenues and higher spending (yes, that’s obvious, but keep reading):

Exploding Deficit

As the chart shows, there have been three basic factors driving up the deficit:

Continue reading “The Exploding Federal Deficit”

Venture Capital Declining

An article in this morning’s Wall Street Journal documents a decline in venture capitalists. Both the number of VC firms and their capital under management have declined sharply:

A large number of individual VCs are also departing their firms. And, the Journal notes:

The actual number of exits might be even higher than the trade group’s figures indicate. Venture-capital funds are typically 10-year investment vehicles. That means even if a venture capitalist no longer actively invests, he or she can remain on a firm’s masthead because they have to wind up their investments in older funds.

The article is worth reading in full for its discussion of the factors — weak economy, reduced investment capital, natural turnover, etc. — that are contributing to the decline in venture activity and the departure of individual VCs.

I don’t know how much this generalizes (readers please chime in) but one VC friend of mine reports two other factors that may be driving him and some other successful VCs from the business:

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