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Friday, July 02, 2010


The monthly employment report will be published at 8:30, but first let's look at Treasury receipts for June. Sources are June 30th 2009 and June 30th 2010. Scroll down to Table IV Federal Tax Deposits.
June 2009:
WIET: 133,830

June 2010:
WIET: 144,435 (+7.9%)
FUT is rising again, which reflects the better private sector jobs performance in recent months. WIET (Withheld Income and Employment Taxes) is now turning in some nice YoY gains. The reason for these numbers is chiefly the better manufacturing environment, and although it takes time, as re-hired workers and transportation workers regain financial stability, these income gains will gradually translate to higher consumption. Right now many are trying to catch back up on all sorts of payments.

Separating the carrying wave from the temporary factors for WIET is one heck of a challenge. I am mentally pegging the carrying wave for WIET from 3.5% to 5%, centered a bit high on about 4.6%. At the end of July I'll have a better reading. Since this is nominal, that should be adjusted for bottom line inflation.

Some of the temporary factors in WIET are Census paychecks and a surge in realtors' commissions related to the housing tax credit-induced boom/bust (which will drop out very quickly). Some of the less temporary factors are gains in refinance mortgage brokers' commissions (and with mortgage rates very low, I expect that to continue for months), the impact of the Gulf oil spill, and state and local layoffs. In September we will get more of a clue as to how deep the state and local cuts really were, because some of the teachers and aides in school systems won't be coming back. And then the steep drop in unemployment benefits (with most benefit losers unable to replace that income) counts as a slow building negative.

In any case, the situation is neither as dire as the doomsters proclaim nor as rosy as the V-shapers proclaim. At this point it's just a non-credit-assisted recovery from an extremely deep recession. These take years, because you have to bootstrap yourself back up. It's all toil and no bling.

But let's suppose we go into the end of the year with a 5% gain in aggregate wages. If we raise taxes significantly next year, we'll knock most of that out, but some of the major drags will remain. We have already legislated tax increases over the next few years, and there is an ongoing hidden tax involved in the renewables mandates for utilities, which are going to continue to raise energy costs for consumers. Although higher retail sales are going to add to state and local finances, the awesome costs of the retirement benefits for public sector employees will continue to rise for years and will outweigh any possible gains. So state and local fees and taxes will continue to rise also.

As current plans now stand, we are really planning to raise taxes an aggregate of about 2% on lower-income people (largely in energy) and about 7% on the highest income bracket. That's too much at this point and probably is equivalent to playing russian roulette with five of six chambers loaded. True, in theory you can pull the trigger and survive, but if you do, the next player is likely to head for the door, leaving you with an unwinnable game.

Most of the European countries (you know, those Socialists we keep hearing about) have been cutting corporate tax rates for years. Many of those countries have scheduled corporate tax rate cuts for this year. The effect of high marginal tax rates is mostly to cut investment sharply, so we are not exactly playing to win. I highly recommend the 2009 Romer and Romer paper about taxation and its effect on GDP, which you will find linked at this NOFP post:
Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5%. In addition, we find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.

We also examine the behavior of output following changes in other measures of taxes. The estimated output effects obtained using broader measures of tax changes, such as the change in cyclically adjusted revenues or all legislated tax changes, are substantially smaller than those obtained using our measure of exogenous tax changes. Thus, failing to account for the reasons for tax changes can lead to substantially biased estimates of the macroeconomic effects of fiscal actions. Finally, we find suggestive evidence that tax increases to reduce an inherited budget deficit do not have the large output costs associated with other exogenous tax increases.
A budget deficit is a kind of tax on its own. The problem for us is that our structural budget deficit is so high that we cannot close it through taxation.

It's going to be interesting to watch new Jersey over the next several years. If the leadership there can turn things around, it may just make believers out of the rest of the country that indeed it can be done at the Federal level, too.

Some good background info here, easy to browse.


But then again, appears the leadership currently being shown in Trenton, NJ and that of Washington, DC are like night and day. Still, one can hope. And pray.
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