It is no secret to readers of this commentary that April is the best month of the year for federal tax revenues and 2017 was no exception, with receipts rising from $438 billion to $455 billion (roughly 4%). This rate of year-over-year increase would imply slow but steady economic growth, but unfortunately that is not the case. This year’s numbers are skewed by a $23 billion increase in corporate taxes which were shifted from March because of a new law which changed the filing deadline for most corporations. Non-withheld individual tax payments declined slightly and refunds increased, meaning an apples-to-apples comparison would show a slight decline in April revenue on a year-over-year basis. Of course, there were mitigating factors here as well—April 2017 had one less working day than 2016—but the net result is that overall tax revenue is not growing significantly this fiscal year despite an almost 4% increase in individual tax withholdings from paychecks.
Taking it Back
You can’t go home again.
Thomas Wolfe; Look Homeward, Angel
Recently some Fed governors have suggested that the central bank might consider reducing its balance sheet by selling some of the Treasury notes and bonds it purchased as part of its quantitative easing (QE) program. Since it is generally believed that QE led to lower long-term interest rates, one might conclude that the unwinding of this trade could lead to higher ones. While it is this commentators’ opinion that the Fed will not engage to sell its Treasury holdings in any significant way, simply maintaining its current position will soon begin to reduce its percentage of long-term holdings.
The Fed’s percentage of longer-term Treasuries will begin to fall more rapidly over the next few year as some of the bonds it purchased in 2011-13 become due in less than twenty years. If current trends in issuance persist (and the continued deficit levels suggest they will) by 2018 there will be over a trillion dollars of outstanding Treasury debt with a maturity greater than 20 years held by the public—an astounding increase from under $200 billion prior to the financial crisis. The ballooning debt caused by the enormous deficits of the recession years in 2009-11 was one reason for the introduction of the QE program. And while concern over continued large deficits has faded from the headlines, another recession and the consequential trillion dollar deficits would almost certainly require another bout of direct Fed purchases. If this goes on long enough, people might begin to wonder if the federal government is constrained by any budgetary considerations at all.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
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