How will last year's markets affect surplus projections? Friday's report on Treasury receipts may be one indicator. The tax plan--the Great Answer to all problems--may hang on these numbers. Of course, whatever way the numbers turn out, they can be spun however one wants. Big surplus? We need to cut taxes to get rid of the future surpluses. Small surplus or none at all? We need to cut taxes to spur the economy to get bigger surpluses. Here is an article on it. I can't say I agree with the sentiments on the last two paragraphs, but nevermind. Hutchinson seems to think that we ought to pass the tax bill whatever the surplus numbers.
Analysis: A politically explosive number?
By MARTIN HUTCHINSON, UPI Business and Economics Editor - Wednesday, 16 May 2001 14:38 (ET)
WASHINGTON, May 16 (UPI) -- The Treasury receipts and outlays figures for
April, due to be announced Friday, are highly uncertain and could be of
great political importance, far more than the latest Fed interest rate cut.
The April Treasury receipts and expenditures figures, more particularly
the receipts figure, is the most important of the year, as it includes
personal income and capital gains tax payments, due April 15. Because
individual taxpayers in general owe money to the government (and the first
quarter of 2001's estimated tax payments are due the same day as the final
2000 payment, thus making the total larger) April's net balance of receipts
and payments is generally in substantial surplus , which when the budget is
close to balance is offset by deficits in other months when tax receipts are
lower.
For April 2001, the consensus forecast, as reported by TheStreet.com, is
for a surplus of $170.6 billion, more than 60 percent of the currently
forecast surplus for the year to Sept. 30, 2001, of $280.7 billion. This
compares to a surplus in April 2000 of $159.5 billion.
However, there is a great deal of uncertainty in these figures, because a
high proportion of the April surplus arises from individual capital gains
tax payments. These have soared in recent years, to $118 billion in 2000,
but can be expected to be significantly lower in 2001.
On the plus side, the mutual funds in 2000 declared capital gains of $345
billion, compared with $238 billion in 1999, thus at a capital gains rate of
20 percent bringing an estimated $21 billion extra into the Treasury. On
the other hand, with the market having been down over the year 2000, and
taxpayers being relatively sophisticated, it is likely that the non-mutual
fund capital gains tax, $70 billion in relation to 1999, dropped sharply in
2000. If it dropped by three quarters (as people sought to offset mutual
fund gains with stock losses), then overall capital gains tax receipts would
be $87 billion, down from $118 billion and April's surplus will be about
$125 billion, no less than $34 billion less than April 2000's number and
$45.6 billion lower than the consensus forecast.
Such a drop will cause an immediate, agonized reappraisal by economists of
the projected FY 2001 and FY 2002 surpluses. A month ago, we guesstimated
the eventual FY 2001 surplus at $155.7 billion, only just over half the
officially estimated $280.7 billion, and suggested that FY 2002 might see a
deficit. We may have been somewhat pessimistic, at least for 2001, as
Greenspan's interest rate cuts will both prop up the U.S. economy and reduce
the Treasury's borrowing costs on short and medium term debt.
Nevertheless, it seems that after Friday others apart from us will be
forecasting a substantial shortfall in the 2001 surplus, perhaps of the
order of $80-100 billion, compared to the current estimate. Needless to say,
such a shortfall would also be reflected, once the numbers are run, in a
huge shortfall from the projected 10-year surplus, particularly as the 2001
shortfall began only with March's borrowing statement, already six months
into the fiscal year.
If such forecasts are made, they will of course have a major impact on the
debate about President Bush's tax cut proposal. The proposal, which passed
the Senate Finance Committee Tuesday, comes to the floor of the Senate
Thursday and is expected to be voted on Monday, after economists have had a
weekend to digest Friday's Treasury announcement. If the prognostications
herein are correct, the opposition will be able by Monday to claim,
correctly, that the surpluses won't be there to pay for the president's tax
cut, and its chances of passage must thereby be greatly reduced.
As I said above, there is a huge amount of uncertainty in what Friday's
figure will show, and it is indeed possible that some special factor will
cause it to be more positive than I have outlined here. Nevertheless, if the
figure indeed comes out as I have suggested, with a monthly surplus in the
$120-130 billion range or lower, then Bush's tax cut may well be defeated by
a pure accident of timing. After all, if the key Senate vote due Monday had
been taken a week ago, the president's tax cut would very likely now face
plain sailing, since the House favors it more strongly than the Senate.
On such things does the fate of nations rest. What a pity, one thinks as a
taxpayer, that the Senate spent two weeks earlier this year discussing
campaign finance reform. |
