Gross tax collection falls 31 per cent so far in June quarter

We’re in the middle of the June quarter, which provides an opportunity to look at the state of the national economy, or at least the state of the national revenues that finance it. According to the most recent Quarterly Economic Impact of Federal Taxations report published by the Congressional Budget Office, gross tax collection — that is, federal taxes plus state and local taxes — fell 31 percent in the first half of the quarter compared to the same period in the prior year. There is a lot of discussion of inflation in the final quarter, and yet we already know that inflation fell 0.1 percent in the year to May.

Gross tax collections will have to rise 4.8 percent year-over-year to compensate for this drop. Surely, then, tax collections must be falling sharply, and if this decline continues — including an even deeper decline in August when the Fed’s July rate hike hits, with the September hike following it — this summer will mark a new downward phase in the Trump administration’s economic approach. That’s especially true because last year in the June quarter gross tax collections grew 11.5 percent. In other words, this year we’re back to the levels of gross tax collections a year ago. But this is a natural part of the business cycle. Although the tax revenues of individual families have begun to increase slowly since the beginning of the year, they are still well below their 2012 peaks. At the same time, corporate revenues are plunging.

To be sure, a big reason corporate revenues have shrunk has been the severe decline in the value of America’s stock market since the beginning of the year. This decline, however, is a fall of face that has very few precedents in history and makes no sense in the context of corporate performance: Corporate profits as a share of GDP are at their highest level ever; corporate profits as a share of the U.S. economy have been in a bubble for years; and corporate profits as a share of government revenues are down to around 5 percent. But the changes in corporate tax rates should also be seen in this context: Companies are temporarily benefiting from a cut in corporate taxes, and then getting a further benefit from a steep reduction in the corporate tax rate over the next few years.

Moreover, the tax cut has passed, so this decline in corporate tax collections will not continue indefinitely. Both Congress and the Trump administration know this, and they hope to change the story at some point. That time may not be now. But should these estimates prove wrong, a whole set of tax policy options comes into play. Of course, a decline in corporate revenues should not be a reason to go easy on efforts to spur the economy. The point here is to bring federal revenues and spending in step — our policies as a nation produce a consistent macroeconomic outcome and that consistency is a key to governance and a good model for economic growth.

That’s why few, even Washington, give a damn about the political consequences of the current fiscal position. We need a federal budget that balances and with it a national spending regime that does not drive up the debt to dangerous levels. In the end, the overall state of the nation’s economy and its economic policy is one of the most fundamental choices we will ever make.

The federal deficit remains at frightening levels, but neither can the incoming Trump administration nor the Senate’s growing conservative majority be as cavalier about the need to pay down debt as it seems.

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