Investors are painfully aware of the decline in the stock and bond markets so far in 2022. Do federal and state officials know of the damage a market crash will soon cause. for the budget and public finances? Tax revenue from capital gains looks like it’s about to crash.
The Monthly Treasury Report for April indicates that capital gains tax revenue will hit record levels in 2021. Markets are telling us capital gains will drop significantly in 2022. What the claims and markets are signaling are correct, a reversal of fortunes for federal tax revenue could be as high as $250 billion. In New York, Connecticut and other states that rely heavily on personal income taxes for revenue, the reversal can be dramatic.
The last time the market fell into this dire straits was during the financial crisis of 2007-09, when the tax rate on long-term capital gains was 15%, much lower than the current 23.8%. Revenue from federal capital gains taxes plummeted 75% in two years, from about $140 billion in 2007 to $35 billion in 2009.
Income tax data for 2021 is not yet available as well as capital gains tax data. However, there is a raw proxy that can give us a picture of where things are. The Treasury report shows personal income tax receipts from the federal fiscal year to date, separated between “withheld” income tax—that is, tax on income earned from wages and salaries public — and “other” tax payments, including taxes on all forms of income investing. The latest report shows $776 billion in “other” income tax income for the first seven months of the current federal fiscal year. This includes April, which is clearly the biggest month of the year for tax filings. This is $325 billion more than the $451 billion total in the highest federal fiscal year for the next seven months in 2019.
Historically, the seven-month “other” earnings figure has averaged a remarkably steady 70% of the full year, with the exception of a disruption in 2020-21 as the market plunges and recovers but with a steady rise. mostly short term. Normally, investors do not sell short positions. They wait and hold on to their profits for at least a year, so that they qualify for the beneficial long-term capital gains tax treatment on sale.
If $776 billion in “other” income equals 70% of the full year figure, then we can look at a record $1.1 trillion in “other” income for the federal fiscal year 2022. Even if revenues continue to decline in the Five months before the 2022 market plunge takes effect, it will still be a record year.
“Other” income tax receipts cover a wide variety of investment income, some of which can be retained despite a troubled stock and bond market. Real estate, for example, has grown tremendously.
The component of capital income can be separated from overall “other” income by looking at Internal Revenue Service data. Capital income tax income on average accounted for about 30% of “other” personal income tax payments from 2013-19, a period when the capital gains tax rate was consistently around 25%. Accordingly, revenue from capital income tax for 2021 could reach 330 billion USD.
The fall from the 2021 peak could be as bad or worse than the 2008-09 plunge.
Two factors can widen and exacerbate a market swoon and a drop in capital gains tax revenue. First, bond yields in 2008 were much higher than they are now. This allowed the revival of the decade-long bull market for bonds to continue well into the pre-pandemic period. Substantial capital gains were present in the bond during this period. After super-low interest rates prevailed during the pandemic, there was nowhere for interest rates to go up. Falling bond prices will leave little potential for capital gains from the sale.
Second, in 2009, inflation was not a concern; in 2022, it’s at a 40-year high. The Federal Reserve is expected to raise interest rates significantly in 2022 – and keep them high until current inflation is tame. This is not a promising economic and financial outlook for capital raising.
We’ll know where we stand by mid-July, when the Monthly Treasury Report will show income tax receipts through the end of June. It will include “other” income tax receipts including June’s estimated quarterly income tax return with updated capital gains estimates for 2022. Weak quarterly numbers for “other” will result in capital gains tax revenue annihilated.
Federal and state officials warned: If you wait until July or later to confirm that a major source of tax revenue has dried up, you may have waited too long to start making budget adjustments. necessary books.
Mr. Jahncke is the president of Connecticut-based Townsend Group International LLC.
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Appears May 17, 2022, print edition titled ‘A vibrant market will crush government budgets.’
https://www.wsj.com/articles/swooning-markets-will-crush-government-budgets-stock-bond-market-tax-revenue-crash-data-capital-gains-11652732258 Falling Markets Will Crush Government Budgets