Tax Receipt Disaster Less Than 2 Months Away

I just started putting numbers to paper as a preliminary exercise for completing my taxes, and it confirms my intuition about what the US fiscal situation may look like later in the year. Tax receipts are currently down because so many people are out of work, not earning anything and thus not paying taxes (and lots are likely working off-the-books in order to avoid sharing meager earnings with Uncle Sam). However, our tax code is insanely progressive and thus dangerously leveraged to high income earners. The extra juice in good years mostly comes from the investments and capital returns of the wealthiest Americans. Conversely, when investment income dries up, it wreaks havoc on government budgets. This is not a mystery but it seems never to register with our political class. I think tax year 2009 is going to be a bloody disaster for government finances when the returns start flowing in, and the reason is pretty basic. The worst of the financial crisis started in 2008 but markets didn't bottom until March of 2009, and recall, February 2009 was one of the scariest months in the market. Many who held their assets through 2008 must have concluded after February that it was time to sell and take losses. And those losses were likely large, large enough to offset subsequent gains made in 2009 and max out the $3000 limit on applying losses to ordinary income. Also, traditional dividend paying companies - of 'widows and orphans' fame - slashed dividends to the bone. The same will play out with interest income, rates fell like a stone likely taking taxable interest income down by hundreds of billions. This enormous pot of taxable income simply dried up starting in late 2008 and continued throughout 2009. So while the worst is likely past for the economy and stock market, the disastrous legacy of 2008 and 2009 is suspended in amber and has yet to be felt fully on government coffers. My own numbers bare this out -dividend and interest income is way down and I have capital losses offsetting second half gains and enough left over to offset ordinary income - and I have no doubt that there are tens of thousands of high-earners just like me whose tax returns filed this coming April will revisit the financial crisis on the federal government as well as state governments. Add this to the wild spending that is going on in Washington and all I can say is get ready to be shocked to your core at how bad the US of A's finances are. States, too.

...and if you followed NBfPB's Tax Avoidance Plan for Obama's America, well, then you are going to deliver that much more bad news to Washington DC, Sacramento, Albany, Trenton or wherever.

UPDATE: Albany's budget woes get worse by the day. Here's my favorite: "Other doubtful aspects of Paterson's budget plan include $250 million of still to be negotiated savings in contracts with unionized state workers." Doubtful? Really? Say it ain't so. Cue the latest from Mark Steyn: "...nothing makes an individual more selfish than the socially equitable communitarianism of big government. Once a chap's enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn't give a hoot about the general societal interest. He's got his, and to hell with everyone else."

UPPDATE: Apropos my main point above, the data is in for 2008...it's bad. Gonna be just as bad, likely worse in 2009.