Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Is The Federal Deficit Really Falling?

Interest-Rates / US Debt Mar 25, 2014 - 05:23 PM GMT

By: Dan_Amerman

Interest-Rates

There are two ways a nation can use economic growth to reduce budget deficits.  The first method is to participate in economic growth, with a growing economy increasing tax collections.  A second method is to raise taxes so drastically that they consume all economic growth.


The United States government recently announced it has some great news - a fast moving economic recovery is slashing the size of the deficit.

“Thanks to the tenacity of the American people and the determination of the private sector we are moving in the right direction,” Treasury Secretary Jacob J. Lew said in the report. “The United States has recovered faster than any other advanced economy, and our deficit today is less than half of what it was when President Obama first took office.”

New York Times

In this analysis, using numbers directly from the White House Office of Management and Budget, we'll take an independent look at these assertions and see if they are supported by the data.

1)  We will examine whether the source of the shrinking deficit is indeed rebounding economic growth, or whether the actual source is higher federal government taxes taking a greater share of the economy.

2)  We will look at how much economic growth is left for the private sector after adjusting for the substantially higher tax take from the federal government.

3)  We will adjust economic growth for inflation, and examine the surprisingly powerful impact of inflation and rising taxes working in combination when it comes to reducing non-governmental economic growth.

4)  We will examine whether this is an anomaly, or is instead the result of fundamental factors that are likely to persist in the future in the United States and in other nations in similar situations.

5) We will consider the implications if the true rate of inflation were to be even slightly higher than the official rate of inflation.

6) We will explore the broad range of implications for investors.

Economic Growth vs. Growth In Federal Taxation

According to official US government figures, the federal deficit, after being fairly stable at just under a $1.3 trillion annual deficit in fiscal years 2010 and 2011, fell to a level of approximately $1.1 trillion for fiscal year 2012, and then dropped all the way down to $679 billion for fiscal year 2013. This is getting close to a 50% reduction in the federal deficit in the two years between fiscal years 2011 and 2013.

During this time in nominal dollar terms (not adjusted for inflation) the reported gross domestic product (GDP) of the United States rose from approximately $14.8 trillion to approximately $16.6 trillion.

In those same years, federal tax receipts rose from a little under $2.2 trillion in fiscal year 2010 up to almost $2.8 trillion in fiscal year 2013.

Now just eyeballing those two figures, it would appear that the federal tax receipts are jumping up faster on a percentage basis than the growth in the economy. Is that indeed the case, and how great is the differential?

(click here to see the supporting calculations)

As shown in the blue bars in the graph as well as the percentages in the table, the United States economy grew 4% between 2010 and 2011, it cumulatively grew 8.8% by 2012, and grew a total of 12.4% by 2013.

Now what is fascinating is when we look at the red bars, which are the cumulative percentage growth in federal tax receipts.

Per the government's figures, the economy grew by 4% in 2011 – but federal taxes grew by 6.5%.

In over two years between 2010 and 2012, the economy grew by 8.8% – but federal taxes grew by 13.3%.

And most remarkably, taking into account the sharp increase in taxes that took place at the end of the 2012 calendar year, while the US economy cumulatively grew by 12.4% between 2010 and 2013 – federal tax receipts grew by 28.3%.

The graph – and the underlying numbers – are unmistakable.

Federal tax receipts are growing at a much faster rate than the economy itself.

So to understand exactly why it is that the deficit has been falling so sharply – it is because the government is taking significantly more of the economy than it previously was.

Determining Growth Not Consumed By Taxes

Another approach is to look at how much economic growth is left for the private sector once we adjust for increasing federal tax revenues. While a somewhat unconventional measure, this could also be called one of the most crucial measures of all.  Because obviously, the more the federal government takes, the less that is available for everyone else.

And if federal tax receipts are rising at rate that is greater than overall economic growth, then the share of the economy available for the private sector must necessarily be growing at a rate that's less than the overall rate of economic growth.

So if we look at the first year between 2010 and 2011, if gross economic growth was 4% (the blue bar), but the federal government's take from the economy rose by 6.5% (the red bar), that means that only 3.6% in growth (the green bar) was available for the rest of us.

Where things become dramatic is when we look at our three years of cumulative growth between 2010 and 2013.

The economy grew by 12.4%, but federal tax receipts jumped up by 28.3%, leaving only 9.6% available for the rest of the country.

How Inflation Changes The Picture

Now an issue with looking only at gross economic growth is that it does not take into account the destruction of a currency's purchasing power. That is, if we just look at GDP, we're not necessarily looking at economic growth, but may actually just be looking at the effects of inflation.

So what is routinely done is to adjust GDP for inflation through the use of a GDP price deflator.  And when we do so here, we find that much of our economic growth disappears.

(click here to see the supporting calculations)

Adjusted for inflation, GDP is now up only 2% through 2011, 4.9% through 2012, and 6.7% through 2013.

For the next step, in order to keep an exact "apples to apples" comparison, we took the same GDP price deflator and applied it to federal tax receipts.  This ensures that federal taxes get exactly the same inflation adjustments as what is being applied to gross domestic product.

Adjusting for inflation, we find that federal tax revenues grew by 4.5% in the first year, by 9.2% over two years, and by 21.9% over three years.

So we see a far more dramatic difference between the growth in the economy and the growth in taxes.  We go from government tax rates increasing at a rate of a little more than twice the growth of GDP in nominal terms (28.3% to 12.4%), to inflation-adjusted taxes growing at more than three times the rate of inflation-adjusted growth in GDP (21.9% to 6.7%).

The real economy (if we accept official US government inflation rates) grew by only 6.7% over three years, while the federal government's real take of that economy rose by a remarkable 21.9%.  Because 6.7% in economic growth is only equal to 31% of the total 21.9% increase in tax revenues, this means that economic growth only accounted for 31% of real tax growth, while it was the increase in tax rates that generated the other 69%.

So while the reduction in deficit is being presented as increased revenues from a surging economy, in fact more than 2/3 of the growth in tax receipts was simply from raising taxes.

Real Private Sector Growth

The next crucial step involves looking at inflation-adjusted GDP and subtracting inflation-adjusted federal taxes, which together determine the real bottom line of what is available for the rest of us.

Net of the increase in federal taxes, real economic growth was 1.6% in 2011, it was 4.1% cumulatively over two years in 2012, and – this is where things get really interesting – our after-federal tax and after-inflation GDP stayed at 4.1% during fiscal year 2013, the very year of the drastic reduction in the deficit.

After federal taxes the real economy cumulatively grew by 4.1% in the two years through 2012, but total growth was still only a cumulative 4.1% in the three years through 2013. That is because all growth in real GDP in 2013 was consumed by higher federal taxes alone.  (Including increases in state and local tax collections would just reduce what is available for the private sector that much more.)

So to place a little more accuracy on the press releases, it wasn't a surging economy that reduced the deficit from $1.1 trillion in 2012 to $659 billion in 2013.  Instead it was the federal government taking 100% of real economic growth for the nation that so dramatically reduced the deficit in 2013.  And because this redistribution of the economy from the private side to the federal government is the result of tax code changes, it is not a one-time occurrence, but will continue to persist with each passing year.

The "Crowding Out" Of Private Economic Growth

In the 2nd half of this article:

4)  We will examine whether this is an anomaly, or is instead the result of fundamental factors that are likely to persist in the future in the United States and in other nations in similar situations.

5) We will consider the implications if the true rate of inflation were to be even slightly higher than the official rate of inflation.

6) We will explore the broad range of implications for investors.

Continue Reading The Article

Daniel R. Amerman, CFA

Website: http://danielamerman.com/

E-mail:  mail@the-great-retirement-experiment.com

Daniel R. Amerman, Chartered Financial Analyst with MBA and BSBA degrees in finance, is a former investment banker who developed sophisticated new financial products for institutional investors (in the 1980s), and was the author of McGraw-Hill's lead reference book on mortgage derivatives in the mid-1990s. An outspoken critic of the conventional wisdom about long-term investing and retirement planning, Mr. Amerman has spent more than a decade creating a radically different set of individual investor solutions designed to prosper in an environment of economic turmoil, broken government promises, repressive government taxation and collapsing conventional retirement portfolios

© 2014 Copyright Dan Amerman - All Rights Reserved

Disclaimer: This article contains the ideas and opinions of the author.  It is a conceptual exploration of financial and general economic principles.  As with any financial discussion of the future, there cannot be any absolute certainty.  What this article does not contain is specific investment, legal, tax or any other form of professional advice.  If specific advice is needed, it should be sought from an appropriate professional.  Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos, DVDs, books and related materials, either directly or indirectly, are expressly disclaimed by the author.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in