By Wolf Richter for WOLF STREET.
Tax receipts by the federal government in 2024 are shaping up to be pretty good. In 2023, Q1 and Q2 tax receipts were crappy because capital gains taxes had plunged because 2022 had been a terrible year for investors, and when it came time to pay capital gains taxes by April 15, 2023, there weren’t a lot of capital gains to pay taxes on.
This year, it’s different: By April 15, capital gains taxes were due on the profits realized in 2023. The year 2023 was one gigantic rally for stocks, bonds, and cryptos. So Q1 2024 tax receipts jumped by $60 billion (+8.4%) from a year ago, to $775 billion (red in the chart below).
We know from other data that tax receipts in Q2 have been solid so far, including that the national debt hasn’t budged in months from $34.6 trillion, despite the relentless surge in deficit spending, and that the balance in the government’s checking account, the TGA, spiked to over $950 billion in the days after April 15 as a result of tax payments coming in.
Interest payments by the government on its gigantic and ballooning pile of debt surged by $46 billion (+21%) year-over-year in Q1 to $264 billion (blue).
In the 20 years between 1995 and 2015, interest payments barely rose despite the debt that kept ballooning because interest rates kept falling as part of the 40-year bond bull market that ended in August 2020.
The measure of tax receipts here is what’s available to pay for regular government expenditures, including interest payments. The measure is total receipts minus contributions to Social Security and other social insurance, that are paid specifically by contributors into those programs and are not available to pay for general expenditures. This metric of tax receipts was released on May 30 by the Bureau of Economic Analysis as part of its Q1 GDP revision.
Interest payments surged because:
The debt that the government needs to pay interest on has surged at a mindboggling pace in recent years.
The higher interest rates are working themselves gradually into the national debt each time an old maturing Treasury note or bond is replaced with a new Treasury security, and each time the government issues new debt to fund the new deficit.
Short-term Treasury bills roll over all the time, and their interest rates have been at 5%-plus for over a year. Now, nearly 22% of the $26.9 trillion in marketable Treasury securities outstanding are T-bills that the government paid an average of 5.36% in interest on in April.
So in April, the average interest rate that the Treasury department paid on all its marketable and nonmarketable securities – on the whole $34.6 trillion schmear – was 3.23%. That’s still low, and it will keep rising as the current yields are working themselves into the pile of debt. But it was the highest since early 2010:
What matters: Interest payments versus tax receipts.
It’s not interest payments in a vacuum that matter, but interest payments in relation to tax receipts. Inflation and growing employment, both, inflate tax receipts. Inflation does so by inflating taxable wages, and growing employment does so by more workers earning taxable wages.
Higher interest rates themselves boost tax receipts because they generate taxable income, not only on the $26.4 trillion in marketable Treasury securities, but also in savings accounts and CDs, money market funds, corporate bonds, etc. American households and businesses hold many trillions of dollars of these interest-bearing assets. We’ve looked at the holdings of households: $3.6 trillion in money market funds, $1.1 trillion in CDs of less than $100,000, and $2.4 trillion in CDs over $100,000. In addition, households earn interest from their other bond holdings, from bond funds, etc. They all generate taxable income, when two years ago, during the 0%-era, they generated very little taxable income.
So the ratio of interest payments as a percent of tax receipts answers the question: To what extent are interest payments eating up the national income.
In Q1, interest payments as a percent of tax receipts dipped to 34.1%. It was 36.1% in Q3, the highest since 1997. In Q4 2023, the ratio had also dipped. In both quarters, tax receipts jumped in dollar terms more than interest payments.
In Q2, the ratio may dip further. And then in Q3 and Q4, the thing will turn around again and shoot higher.
In the 15 years between 1982 and 1997, the ratio was higher than today; and in the 10 years between 1983 and 1993, it ranged from 45% to 52%.
Back in the late 1980s and early 1990s, interest payments were eating up about 50% of the national tax revenues, and the US was careening toward a serious crisis. It wasn’t until then that Congress, which decides fiscal matters, had a come-to-Jesus moment and dealt with the ballooning deficit, further helped along by the budding Dotcom Bubble at the time, which generated huge capital gains, employment, and wage growth.
Interest payments as % of GDP.
Interest payments jumped to 3.8% of GDP in Q1, the worst since 1998 (the ratio is figured apples-to-apples: quarterly interest expense not adjusted for inflation, not seasonally adjusted, not annual rate; divided by quarterly GDP of $6.93 trillion in current dollars, not adjusted for inflation, not seasonally adjusted, not annual rate).
This is relentlessly heading in the wrong direction at a disconcerting pace:
Higher yields will solve demand problems.
The government has been selling massive amounts of new debt week after week. Someone has to buy this debt, and when not enough investors want to by the debt at the current yield, yields rise until enough investors emerge that find that higher yield appealing.
We know what happened when the 10-year Treasury yield briefly hit 5% in October last year: it unleashed an epic buying frenzy amid huge demand that then pushed the yield back down.
So there will always be enough buyers because the yield will rise to attract them until every last one of the Treasury securities is sold. But the issue is that those higher yields will cause interest payments to spike further.
The classic long-term unwanted remedy and consequence to overindebted governments is inflation. Inflation has the effect of inflating tax receipts, and in devaluing the purchasing power of the old debt – it’s far easier to redeem old debt with devalued dollars. And there is good reason to think that continued inflation will also be a consequence and long-term remedy this time around.
Source: WOLF STREET
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