Last week I wrote about how big federal deficits are good for the stock market. They are bad for total indebtedness that we are leaving for our grandchildren to deal with, but they are great for stock market investors. In a similar way, when there is a very small deficit or even a surplus, it tends to be a big negative factor for stock prices.
This week I want to turn to just one part of the deficit equation, which is total federal receipts. These data are published in the Monthly Treasury Statement. For the chart above, I have adjusted the raw data on total federal receipts, dividing it by nominal GDP to show how much of the USA’s total economic output gets taken up by the federal government.
That percentage goes up and down over time, partly due to natural economic variation, and partly due to the vicissitudes of the mood among our legislative leaders in Washington, DC. As that percentage goes down and up, more or less money is left in the public’s hands to do things like buy stuff they want, or invest in the stock market. History proves that when Washington, DC takes too big of a bite out of the economy, the stock market suffers and thus so does the economy.
The magic threshold seems to be around 18% of GDP, and we appear to be heading there again. The current reading is 17.4%, based on projected GDP numbers for Q4 of 2014. Sometimes we can get an economic recession with total federal receipts at a level below 18%. Back in 2007, it topped out at 17.8%. And back in the late 1990s, it managed to stay above 18% for a while before the economy finally went into recession.
One point about that late 1990s instance was that the NYSE’s A-D Line peaked in 1998, and the total number of listing stocks on the Nasdaq actually peaked all the way back in 1996. So the repressive forces of excessive taxation were already having a noticeable effect, even though it took until 2001 to start showing up in the unemployment rate.
For calendar year 2014, total federal gross receipts were up 9.6%, while GDP was up 4.2% (again, based on projections for Q4 data which are not in yet). In other words, tax collections are rising faster than the GDP is growing. If this keeps up, we should see it exceed that 18% threshold in a few months.
This is an important issue right now, because lawmakers are responding to the big drop in gasoline prices by suggesting that now might be a good time to raise gasoline taxes. And in typical Washington, DC fashion, they are not talking about using the extra revenues to reduce the deficit (which is still 2.7% of GDP), but rather for more spending.
Federal fuel excise taxes are currently 18.4 cents per gallon of gasoline, and 24.4 cents per gallon of diesel. States also add on varying amounts of their own fuel taxes, and state legislators are also talking about taking away some of our savings from lower gasoline prices. That seems like a lot already, and raising that tax rate would make it even bigger. But it would not affect the total revenues all that much because fuel excise taxes are only a little over 1% of total federal revenues.
Individual income taxes make up the biggest percentage of total federal revenues, and they are sensitive to investment returns from the stock market. So with the SP500 up 11.4% in 2014, investors will have a good bit of capital gains to report in April. And as investors pay those taxes, money will have to be taken out of the economy where it can be useful, and get sent to Washington, DC.
Total federal receipts are not yet up to that 18% threshold where recessions are found. But they are getting closer, and so later this year we will have much to worry about in terms of having too big of a federal bite.
The McClellan Market Report