The Tax-less Recovery

It is now old news that the Treasury has reported that the US budget gap for June was just over $94 billion which compares with a surplus of over $33 billion in the same month last year. Several economists made the observation that this was the first June budget with red ink since 1991, but that seems beside the point. The accumulated deficit for the first nine months of the fiscal year was $1.086 trillion.

The deficit may be wider than many analysts expected, but spending is not the immediate problem. Congress and the Administration committed themselves to breaking all records for outlays this year and next in the hopes of salvaging a wrecked economy. The surprise in the Treasury numbers was on the receipts side of the ledger.

Individual taxes were down in June to $92.9 billion from $108.6 billion in the same month last year, a 14% decline. Unemployment will continue to rise, perhaps for another year, so the shortfall in individual tax receipts will get worse. Corporate tax revenue began its sharp drop earlier in the year and individual receipts are likely to match this drop in 2010. Revenue from corporations was down to $32.5 billion in June, a drop of nearly half from the $58.3 billion brought in a year earlier.

The employment problem affects the ability of both companies and individuals to pay their taxes.  One of the harshest realities of the current economic trouble is the tragedy that companies that are in trouble often have no means to remain in business without firing workers.  GDP is falling so fast that supporting a growing national work force and profitable businesses are almost mutually exclusive.

The budget is telling analysts, sotto voce, that employment recovery and business recovery cannot co-exist in the current economy. The government will have to choose the direction of the stimulus if it does not began to be successful broadly across a great swath of geography and industries soon.

The media has called the glimmers of an upturn in the economy a “jobless recovery”. GDP may move up a percentage point in the fourth quarter or early next year while unemployment races to the 10% level. But, the term “jobless recovery” does not capture the breadth of the trouble, which is that any improvement is likely to be a “tax less” one in which businesses barely make their expenses and cannot add workers at all.

The greatest irony of low tax receipts is that they, at least partially, argue for tax rebates. When the economy collapses in on itself so badly that neither people nor enterprises can make normal contributions to the operations of the government then the most fundamental financial bond between Americans and their government has been severed.

Solving the falling GDP problem and fixing the economy is not exactly the same thing. The government ultimately must be a beneficiary of its own stimulation efforts.  It is easy to argue that all recoveries eventually lead to an improvement in tax revenue, but the timing of that is essential now that the government is in the midst of borrowing several hundred billion dollars.

Jobless may be bad, but tax less creates a magnitude of problems that is difficult to contemplate.

Douglas A. McIntyre