An increase in individual stock trading by Americans last year contributed to a record tax haul for the US federal government this spring — narrowing the budget deficit and surprising Wall Street, but likely leaving President Joe Biden in no strong shape. Not because he is fighting for his financial agenda. in Congress.
Ax collections are running at a record high since the start of the fiscal year in October – up 43pc over the same period in 2019, the most recent comparison not bothered by the pandemic, Treasury Department data shows.
Much is behind wage increases and increased corporate profits, testament to the powerful economic recovery that Biden and congressional Democrats are struggling to convince voters. But another factor was capital gains coming from Americans trading securities during the pandemic. Small business income or personal taxes from the sale of stock and other assets are nearly three times higher than 2019 levels.
Tax preparers reported a significant increase in their clientele of people using services like Robinhood in the annual season that closed last month. Those closely monitoring Treasury data have noticed similar trends.
“A large portion of that has come from short-term capital gains,” said Lou Crandall, chief economist at Wrightson ICAP LLC. “Meme stocks were very, very good for the IRS.”
Growth in revenue prompted the Treasury last week to cut its debt-sale plans more than dealers expected. But whether there has been a fundamental change in the flow that reduces the deficit remains a question. Such a shift would offer Biden ammunition to persuade Democratic Senator Joe Manchin, who has pitched the president’s long-term economic agenda on concerns that a bigger package would further drive inflation and add to debt.
“There is uncertainty about whether this year’s elevated tax collections are a one-time or more structural shift,” interest rate strategists at Goldman Sachs Group, led by Pravin Korapati, wrote in a note last week. “There are reasons to suspect that it is the former — the biggest surprises came from non-withholding receipts, and a stronger contribution from capital gains taxes (rather than the more reliable withholding tax receipts) appears to be the most likely driver.”
There’s one more shoe to drop: the impact of inflation in driving the pace of federal spending. Inflation-adjusted benefit programs such as Social Security and nutrition assistance, as well as higher costs for federal employees’ wages, are coming down. As the Federal Reserve raises interest rates, with Treasury yields climbing, debt-servicing costs are likely to rise as well.
“The future of higher interest rates presents a unique challenge because rising interest payments are both a result of inflationary spending policies as well as a contributor to debt due to uncontrolled spending,” said Representative Jason Smith, the top Republican on the House Budget Committee. said in a statement.