Doylestown Wealth Management - LPL

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May 2019 Budget Commentary

Where It Comes From

Given the plethora of taxes, fees, tariffs, and loans which flow into the federal government’s coffers, we thought it might be useful to review the composition of federal revenues.  As you can see, the vast majority of Washington’s cash flow is received from taxes on individuals (both income and payroll taxes), followed by net borrowing.  Corporate income taxes, excise taxes, and customs duties, etc. account for a very small portion of the total.

Individual Taxes include both payroll (FICA and Medicare) as well as regular income taxes.  Roughly 75% of these taxes are withheld at the source—paychecks, pension disbursements, IRA distributions, etc.  Net borrowings reflects the difference between the sum of new debt issuance and debt redemption.  Individual and corporate amounts are net of refunds.

The key takeaway from the chart is that the federal government revenues are almost completely dependent on taxes on individuals and borrowing—everything else it does to raise revenue is almost irrelevant.  One can, of course, look at this in two ways: one, that things could be much simpler if we borrowed a bit more money and eliminated all of the other taxes, fees, duties, student loan repayments, etc.  Or conversely, one could argue that the individual taxpayers bear a disproportionate share of the burden of taxation, and that shifting some of the weight to other sectors of the economy would be more equitable.

Crisis Averted

Some readers may remember that we raised an issue in our February missive regarding a drastic falloff in withholding tax receipts.  Whatever the cause, the problem seems to have gone away, as inflows for the last three months have seen year-over-year increases.

Just in case you thought we were imagining things, however, we would like to point out that the Congressional Budget Office has noted the same issue with January’s receipts.

Receipts collected through April 2019 were $30 billion to $40 billion (or 1 percent) less than CBO expected earlier this year when it published its January 2019 report on the budget outlook.2 Most of that shortfall stems from lower-than-anticipated withholding of individual income and payroll taxes in December 2018 and January 2019. Collections received and refunds paid during tax-filing season, from February through April, were largely as expected for individual and corporate income taxes. The sources of the shortfall will be better understood as more detailed information becomes available later this year.

Monthly Budget Review for April 2019, Congressional Budget Office, pg.1-2

We will follow up if CBO publishes anything enlightening.

Taking Credit

Touting the success of one’s past predictions is an enterprise generally best avoided.  However, given the recent reports regarding the unpleasant surprise received by some taxpayers this year, we will take the opportunity to quote this commentary’s conclusion of May 2018:

“The bottom line is that the withholding changes for most taxpayers amount to a minimal increase in pay—something resembling a cost-of-living raise– and those who used to itemize their deductions may face an unexpected bill in April 2019.”

You read it here first.

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.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.